Is ‘Smart Regulation’ Not?

In regulation, as in most areas, the Obama administration wants you to believe it is bringing a revolution to government. Take hidden credit-card and airline fees, or the scores of medication plans available in Medicare Part D. Under current federal rules, consumers remain perplexed by the choices, while companies are free to reveal some fees and not others. It’s a mass of confused detail that requires constant oversight by regulators. But what if the government required every company to reveal all hidden fees in simple form, making them available to consumers with new search-engine technology? What if shoppers weren’t forced to examine 50 pages of fine print—which they never do anyway—or if regulators didn’t have to nose about trying to uncover which fees were divulged and which were not? Instead, what if the companies had to send their customers, once a year, an electronic file adding up all the costs, as a neat total? Then regulators could just step back and let a more informed market work.

This approach, which the administration refers to as “smart disclosure,” was unveiled at a White House-sponsored conference in March. And, according to Richard Thaler, a University of Chicago behavioral economist, it’s an idea that “has the potential to completely change the way we think about regulation.”

Every revolution must have its Karl Marx, of course. In this case it is University of Chicago scholar Cass Sunstein, who coauthored a 2008 book with Thaler called Nudge: Improving Decisions About Health, Wealth, and Happiness that seeks to reconceive good government under a somewhat oxymoronic concept called “libertarian paternalism.” To boil the idea down: Free markets are best, but government must often prod people to make the right choices within those markets, especially in super-arcane areas such as health care and finance. Today, Sunstein is Obama’s regulatory guru, the head of his Office of Information and Regulatory Affairs, and he has taken his revolution to Washington. “Smart regulations save lives and dollars,” Sunstein wrote in a White House blog recently. “In areas that include food and workplace safety, clean air, fuel economy, energy efficiency, and investor protection, well-designed regulations are preventing tens of thousands of premature deaths and hundreds of thousands of illnesses and accidents—and saving billions of dollars.” In all, the administration says that its new set of rules will yield more than $91 billion in net benefits—more than 25 times what the George W. Bush administration achieved in its first three years in office.

Another dimension of smart disclosure is to use databases to help people, especially those applying for government help, cut down on paperwork. “The key fact is that for old people, the [Medicare] drugs you take this year are the ones you took last year. So the government can fill this out for you. Why shouldn’t they?” Thaler asks. “The same is true for student-loan applications. You need tax records. You’re borrowing from the government. The government knows your taxes: It’s your parents’ taxes. So it can just pre-write it on the form. All of this is consistent with the ‘nudge’ mantra. To make things easy. None of this would matter if everybody was capable of analyzing drug plans. But if they’re human, they’re not.”

THE OTHER CASS

All this may be impressive in theory, according to Mitt Romney’s presidential campaign, but in practice it has only amounted to more out-of-control government. Indeed, to hear the Republican candidate tell it, he has no more stark difference with Barack Obama than over regulatory philosophy. “A Romney administration will act swiftly to tear down the vast edifice of regulations the Obama administration has imposed on the economy,” declares the Republican’s economic plan called “Believe in America.”

According to another Cass—Oren Cass, Mitt Romney’s domestic policy adviser—the Obama administration’s “supposedly sophisticated view” is really just an intellectual fig leaf for an impulse to regulate more. “If you look at the president’s approach to ‘Obamacare,’ to Dodd-Frank, that is not the actual legislative approach they’re taking,” Cass says. “Obamacare and Dodd-Frank I don’t think could be characterized as ‘smart.’ ”

He may have a point. Both the health care law and the financial-reform act—unquestionably Obama’s signature achievements domestically—contain thousands of pages of new regulations that are almost impenetrably complex, although perhaps that’s in part because the administration left the details to Congress and not to Cass Sunstein. (Committees, after all, are not good at making revolutions; one need only recall the Committee of Public Safety during France’s Reign of Terror.)

Oren Cass says that another illustration of what the administration is actually doing is what ensued when Congress voted down Obama’s much-vaunted cap-and-trade law intended to drastically cut fossil-fuel pollution. Obama’s response was to look for ways around Congress and its laws, saying that cap-and-trade was “just one way of skinning the cat.” The administration, Cass says, took “an approach to greenhouse gases that’s in direct conflict with what the Clean Air Act is intended to do. Carbon dioxide was never intended to be regulated as a pollutant,” as the Environmental Protection Agency has done. Because of EPA’s declaration, coal-fired and other power plants will have to shut down, energy costs will rise, and the cost in jobs will be huge, Romney maintains.

Romney has spelled out only a few steps that he would take on the environment and energy, and Cass concedes that the candidate has not come forward with specific regulatory plans for finance—“Stay tuned,” he says. Yet Romney’s record and views are fairly clear. “The Obama administration identifies what it thinks is a problem and says, ‘Let’s regulate,’ ” Cass says. Romney would move much more carefully and would direct regulation just to “market failures”—and only then after vigorous vetting. He supports the “Reins Act,” the nickname for a House bill formally known as the Regulations From the Executive in Need of Scrutiny Act (sponsored in January by Rep. Geoff Davis, R-Ky.) that would require Congress to vote on any major regulation before it goes into effect. Romney also wants a “regulatory cap” that would hold at zero “the rate at which agencies could impose new regulations.” What that means is that if any agency sought to issue a regulation, even when required to by law, it would have to go through “a budget-like process” and identify offsetting cost reductions.

“Substantively [Romney is] not opposed to regulation. He recognizes there are market failures,” Cass says. “Regulation is an important part of a market economy.” But any new regulation should be directed to the “identification of market failures and to addressing those failures.” Cass adds that Romney has been a “very strong supporter of environmental protection. Even on power-plant emissions, actually dirty emissions affecting human health, he was second to no one in saying we should address this.”

Even so, Cass admits, Romney would not likely attempt a latter-day Kyoto or other international treaty restricting carbon emissions. Romney argues that developing countries will refuse to take part and that the best approach is to simply have science advance ways to curb global warming, which, Romney now says, may or may not be actually happening. (That assertion contradicts what he wrote in his 2010 book, No Apology, when he stated plainly: “I believe that climate change is occurring.”)

ROMNEY’S DAY ONE

On his first day in office, Romney says, he would issue an executive order paving the way for waivers on the health care law for all 50 states. He would repeal Dodd-Frank and replace it with “a streamlined regulatory framework” not yet identified. He would “eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda.” He would trim legal liability in medical-malpractice cases, “preventing excessive damage awards, limiting class-action lawsuits to those situations where they are actually warranted, and empowering judges to sanction more effectively trial lawyers and parties who bring frivolous claims,” according to the Romney plan.

The Romneyites also belittle the Obama administration’s boast that, under a January 2011 executive order, the president called for a review of all rules—a “look back,” as it’s known—and found savings of $10 billion over the five years. That’s a pittance, the Romney camp scoffs, but, more important, it believes that the administration’s new rules are adding untold costs that vastly outweigh the savings. “To take just one example,” the Romney economic plan reads, “the EPA has proposed a new regulation that could designate nearly every county in the United States that monitors ozone levels as ‘out of attainment’ with the government standard. The result could be up to $90 billion in new costs on American industry annually.”

Because Romney has yet to issue a specific regulatory plan, it’s not easy to gauge his proposals. But measured against his record as Massachusetts governor, he talks a much better game than he has played. As Boston Globe reporters Michael Kranish and Scott Helman write in their book, The Real Romney, the new governor promised he would take a hard look at government bureaucracy, aided by his handpicked management consultants, and would implement reforms that would amount to “the most significant restructuring of state government in half a century.” But Romney’s cuts to the Massachusetts state bureaucracy turned out to be fairly modest. “After four years, he reduced the payroll of agencies under his direct control by 603 jobs, according to his administration’s tally. By contrast, a Republican predecessor, William F. Weld, had closed state hospitals, privatized services, and slashed about 7,700 jobs,” the authors write. 

RHETORIC AND REALITY

One irony of the two camps’ diametric positions is that, in practice, Obama has often tried hard to appease the energy industry and Wall Street, while Romney has sought to meet “greens” and other progressives in the middle. On energy, Obama has been, “pretty aggressive about trying to develop natural resources. He resumed drilling in the Gulf [of Mexico] but with higher environmental standards,” says one campaign aide who spoke on condition of anonymity. The president has spoken of promoting an “energy revolution” around natural gas, and Obama directed the Interior Department to allow hydraulic fracturing, or fracking, under new rules that are not very different from a law that conservative Republican Gov. John Kasich just signed in Ohio. Meanwhile, Romney, as governor, imposed a new set of regulations on health care—the template for Obama’s reform plan—and for a time supported regulation of greenhouse-gas emissions.

Certainly Dodd-Frank and the Affordable Care Act are not terribly good examples of smart regulation. Many observers on both sides of the aisle note that Dodd-Frank’s 250-plus rules have created endless loopholes to exploit and opportunities for delay. Rather than establishing simple rules to break up banks or requiring set amounts of capital, Dodd-Frank gave a slew of executive branch committees and agencies responsibility for determining those yet-to-be-decided levels and for monitoring them. The act also did not fix the too-big-to-fail problem beyond a host of as-yet-unwritten “living wills” that were supposed to tell regulators how to liquidate the banks in a crisis. And in a development that has alarmed even some conservatives, the largest surviving banks—mainly Goldman, Citi, JPMorgan Chase, Bank of America, Morgan Stanley, and Wells Fargo—are growing bigger and even more global relative to the rest of the industry.

Romney has said little more than that a new law is needed, one that is much simpler, more predictable and efficient, and less dependent on “unaccountable” agencies such as the new Consumer Financial Protection Bureau. He also concedes that “some of the concepts in Dodd-Frank have a place,” particularly greater transparency for “interbank relationships” and enhanced capital requirements.

As with Dodd-Frank, the administration left it to Congress to hash over the 955-page Affordable Care Act, and the outcome was similar: a complex set of incentives that, while they are slowly changing the health care industry, remain opaque and of questionable effectiveness—that is, if the Supreme Court doesn’t overturn the law in coming weeks. At a press breakfast in April, outgoing Sen. Jim Webb, D-Va., blamed Obama for playing too passive a role, just as he did during Dodd-Frank (when the president embraced the “Volcker Rule” barring banks from hedge-fund-type trading only after a year of hesitation). “If you were going to do something of this magnitude, you have to do it with some clarity, with a clear set of objectives from the White House,” Webb said. What happened in the end, the senator said, “was five different congressional committees voted out their version of health care reform, and so you had 7,000 pages of contradictory information. Everybody got confused.”

The Obama administration concedes that Congress—and especially the GOP-controlled House—has often muddied, even held back, its regulatory revolution. But it says it still has plenty of good battles to fight, and that Sunstein is on the attack. How much longer Obama will have to implement his revolution is another matter.