Commentary: The flawed logic of Trump's order on regulations

Trump
White House Chief of Staff Reince Priebus (from left), National Trade Council adviser Peter Navarro, Senior Adviser Jared Kushner, policy adviser Stephen Miller, and chief strategist Steve Bannon watch as President Trump signs an executive order in the Oval Office of the White House.

 

Though the travel ban received considerably more attention, another recent Trump administration executive order should also be the target of nationwide street protests.

The order is meant to slash "unnecessary" regulations. President Trump's proposal is quite simple. For every new regulation, knock out two others. And require each regulatory agency to offset the full economic cost of its new regulation by revoking existing rules. According to Trump, the order will fix this problem: it has become "impossible to start a new business."

Maybe so, but official statistics show that new businesses have been on the rise since 2010.

Even though the topic sounds dry and much of the general public won't notice, the order could have far-reaching implications for the well-being of every American. For example, if the Environmental Protection Agency found out that our drinking water is more polluted with toxic chemicals than we thought, it could only impose new rules if it scrapped at least two completely unrelated - but potentially very valuable - environmental regulations from its books.

This is quite upsetting for many reasons.

First, because this rule is completely arbitrary and, frankly, quite ludicrous. And second, because it may actually do severe damage to the ability of regulators to protect the American public from what a deregulated market might inflict on them. Americans will surely remember the great Enron scandal. Fortunately, experts predict that the new executive order might not pan out exactly as intended. But no one really knows its complete implications yet.

A much deeper and more worrisome reason for concern is the completely flawed logic behind this proposal and the utter disrespect for a long-standing and proven American tradition based on first economic principles: cost-benefit analysis.

For the longest time, American regulatory agencies have been forced to defend any new regulation by demonstrating that the benefits to society exceed the costs. This burden is not to be underestimated. Unless a lot of careful research effort goes into designing a new regulation, it will not hold up in court if challenged. In 2015 for instance, the Supreme Court did not uphold the EPA's mercury and air toxic standards as the agency failed to properly factor in the costs.

This procedure makes complete economic sense. If reducing air pollution from power plants costs industry $1 billion but saves us $10 billion in health-care expenditures, the regulation is worth having. The $1 billion cost is irrelevant on its own. Should we never build roads because they cost money? Based on this reasoning, Michigan's decision to switch Flint's water supply from Lake Huron to the notoriously polluted Flint River was a real winner.

Clearly, you cannot judge a regulation as if there were no benefits. No reasonable economist would argue with that, and so should no Republican.

Of course, it is not always quite that easy. In reality, cost-benefit analysis can be daunting exercise.

Can it be contentious? Yes, as proven by a history of litigation.

Can there be mistakes? Sure, although follow-up studies many years later often show a tendency to overestimate compliance costs to firms. Firms tend to get innovative when facing a new challenge.

Just as I might check actuarial tables to decide whether to buy more life insurance, there is a science to assessing the value of regulation. There is always room for discussion about whether rules are too lenient or too stringent, but they are painstakingly and thoroughly crafted and reviewed. It is reasonable to ask questions about how costs and benefits are calculated, but the Republicans' desire to ditch regulations regardless of societal benefits is simply outrageous.

The GOP's frontal attack on landmark environmental regulation, carefully hidden as a pro-small business initiative, also marks a sharp departure from Republican economic thinking for many decades. Granted, there are exceptions that prove the rule.

Some prominent Republican leaders (and economists) such as George Schultz, Hank Paulson, and James Baker, have publicly advocated for stringent environmental regulations and taxes on pollution. Such senior statesmen recently tried to pitch a carbon tax to Trump's advisers. There is a green coalition among GOP senators, and the ConservAmerica PAC lobbies for "climate realist" Republican candidates. So why are none of those voices loud and clear in today's Washington? What happened to the generation of widely respected and influential Republican economists?

From the recent lack of pushback in Congress, one can only conclude that the GOP has become so unfriendly to (conservative) voices that defend basic principles of economics and science that such individuals have little choice but keep quiet. This is a sad state of affairs.

Trump says that fewer regulations will bring the American dream back. Let's hope it does not turn into a pollution nightmare instead.

Arthur van Benthem is an energy economist and professor of business economics and public policy at the Wharton School of the University of Pennsylvania. arthurv@wharton.upenn.edu