Reforms key to job growth

Opinion: June 28, 2011 at 12:00a.m.

By Michael Greenstone

McClatchy-Tribune

CAMBRIDGE, Mass.

Yes, the Obama administration’s regulatory reform proposals will help spur private-sector job growth by identifying the regulations that fail to protect American families and then reforming or removing them.

Despite their centrality to our economy and our well-being, the debate over regulations has remained unchanged and largely uninformative for decades.

The opponents of regulations shout that they cost jobs. At an equal volume, proponents claim that the failure to adequately regulate costs lives or in some other way endangers our well-being.

Indeed we see these debates taking place right now over the regulatory decisions required by the health-care and financial-reform bills passed by Congress, as well as the fight over the authority of the Environmental Protection Agency to regulate greenhouse gases.

These debates miss the central question about regulations: are the costs justified by even greater improvements to Americans’ health and wellbeing? The Obama administration’s recent regulatory reform proposal, spelled out in Executive Order 13563, is a revolutionary step in the right direction. It reaffirms the principle, established in the Reagan administration, that enacted regulations should have benefits that exceed their costs.

Break from tradition

Where the President’s Executive Order breaks from tradition is the requirement that agencies routinely revisit the measurement of costs and benefits of existing regulations and identify the least costly ways to achieve a regulation’s goals. It then requires agencies to amend their regulations, based on these findings. Supporting these reforms should be natural, but it should not be lost that these are dramatic changes in regulatory policy.

Until the president’s reforms, the approach to developing regulations has not been inspiring. When a potential regulation is under consideration, the implementing agency estimates its likely costs and benefits. Since the regulation is untested, decisions must be made based on an incomplete analysis.

Once a regulation is implemented, it goes on the books and generally stays there unexamined for years, often decades. If the costs to our economy outweigh the benefits, we generally won’t know and the regulation will remain in force.

This approach of limiting evaluation to the period before the regulations take place lacks common sense. After all, this is the point when we know the least.

If a company hired a new employee, the human resources team would check references and other background information for that person prior to employment. But would the evaluation process end there? Certainly not. The employer would use year-end performance reviews and other information to determine the employee’s compensation and career path. There is no reason that the federal government cannot act with this same goal of continuous improvement.

Michael Greenstone is the director of The Hamilton Project at the Brookings Institution and the 3M Professor of Environmental Economics at the Massachusetts Institute of Technology. He served as chief economist on President Obama’s Council of Economic Advisers in the first year of his administration. Distributed by McClatchy-Tribune Information Services.