How to Get Rid of Obsolete Regulations

The House this week is considering H.R. 1675, the Encouraging Employee Ownership Act, sponsored by Rep. Randy Hultgren (R-Ill.). I’ll leave it to my colleague John Berlau to comment on the bill’s impact on employment and financial regulation. But I do want to point out an important regulatory reform it contains for getting rid of old or obsolete rules. The idea is similar to something CEI has been promoting for years: retrospective review. While this particular bill would only affect the Securities Exchange Commission (SEC), the model can easily be applied to other agencies.

Typically, benefit-cost analysis for regulations is done only before they come into effect. Once a rule goes live and we actually have real-world data on it, nothing is done to measure it. This is a problem, especially since complicated rules are prone to unintended consequences. Even the most diligent analyst cannot foresee everything. That’s why regulations should also be subject to cost analysis after coming into effect, not just before.

There are lots of ways to do retrospective review. The way the Encouraging Employee Ownership Act goes about it is to require the SEC to, at least once per decade, look at each of its “significant” regulations (for which there is a special definition) and have the Commissioners vote on whether to keep them, scrap them, or update them. This review doesn’t necessarily involve benefit-cost analysis, just the SEC Commissioners’ judgment. This sort of periodic review is a regulatory best-practice that all agencies should engage in periodically.

The entire Code of Federal Regulations is now longer than 175,000 pages long. Surely some of its rules are obsolete, redundant, or ineffective. These should be gotten rid of, and retrospective review is one way to encourage agencies to clean out their regulatory attics every now and then.

The Encouraging Employee Ownership Act’s review procedures are an improvement on the status quo. But there is one further improvement I would make: have the review to be done outside the agency, not inside. While the SEC might prune back rules that are obviously outdated, the Commissioners are unlikely to vote for any major reductions in their own power and authority. Having the review done instead by the Office of Management and Budget (OMB) or by an independent commission, such as the one the SCRUB Act would create, would have fewer incentive problems than asking the SEC to police itself.

Another, simpler model would be to simply have built-in sunsets for all new regulations. Rules would expire automatically after, say, five years unless Congress votes to keep them. This means obsolete or harmful rules would automatically fall off the books without Congress or agencies having to do so much as lift a finger.

Regulatory reform is a neglected issue compared to more telegenic issues such as tax and budget battles, immigration, or foreign policy. But regulation is just as important, if not more so. The Encouraging Employee Ownership Act’s retrospective review requirements for the SEC represent a step in the right direction. If anything, all federal agencies should be subject to similar reform.

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