A Long History of Analysis and Intervention

by Thomas McGarity

The origins of Executive Order 12866 go all the way back to the Nixon and Ford Administrations. 

Soon after the enactment of the Occupational Safety and Health Act and the Clean Air and Water Acts, affected industries began to complain bitterly about the burdens the new wave of public interest statutes imposed on them. 

The business community was also chaffing under the National Environmental Policy Act’s requirement that federal agencies prepare environmental impact statements (EISs) for major federal actions that significantly affect the quality of the human environment. Although the EIS requirement only applied to federal agencies, it was applicable when a company needed a permit to build a nuclear power plant, drill on federal lands, and many other business related activities.

The business community observed the potential for EIS requirements to bog down agencies in a great deal of paperwork prior to taking action and decided that what was sauce for the goose was sauce for the gander. They posited: why not make regulatory agencies prepare lengthy statements detailing the effects of major regulatory actions not only on the environment, but on the regulated industries themselves?

Responding to calls for economic impact statements, the business-friendly Office of Management and Budget (OMB) persuaded President Nixon to require the newly created Environmental Protection Agency and Occupational Safety and Health Administration to send their proposed regulations through an interagency "Qualify of Life" review. The agencies were required to prepare a summary of the costs of each proposed regulation and its alternatives to accompany it through the review process.

The Quality of Life review became more of a vehicle for allowing other governmental agencies (and their constituents in the regulated industries) to gain access to EPA and OSHA decisionmakers behind closed doors than as a mechanism for forcing those agencies to regulate in a rational way.

President Ford formalized the review process and expanded it to include all executive branch agencies in Executive Order 11821. That executive order required the agencies to prepare an "Inflation Impact Statement" (IIS) to accompany all "major federal proposals for legislation, rules and regulations."

He delegated responsibility for implementing the new program to the newly created Council on Wage and Price Stability (COWPS), to review proposed rules and comment upon them and their associated IISs in rule-making proceedings.

OMB's criteria for IIS’s reflected its conclusion that the inflationary impact of a proposed rule could best be ascertained by comparing in a quantitative fashion the proposal's costs and benefits in light of the costs and benefits of its alternatives. 

President Carter promulgated Executive Order 12,044, which expanded the Ford Administration's IIS program and changed its direction somewhat. The regulatory analysis requirements were only applicable to "major" significant rules. The regulatory analysis for such rules had to contain a succinct statement of the problem, a description of the major alternatives, an analysis of the economic consequences of each of these alternatives, and a detailed explanation for choosing one alternative over the others. The executive order did not explicitly require a cost-benefit analysis. 

COWPS retained its role as critical analyst and commentator. In addition, President Carter created the Regulatory Analysis Review Group (RARG), composed of fifteen agencies (including COWPS) and chaired by the Council of Economic Advisors, to review RAs and comment through COWPS in agency proceedings.

Within a month after assuming office, President Reagan rescinded the Carter executive order and replaced it with Executive Order 12,291.

Unlike its predecessors, Executive Order 12,291 was intended to impose substantive restrictions on agency rulemaking as well as analytical requirements. To “the extent permitted by law," all federal regulators were to choose regulatory objectives that maximized the net benefits to society, to select from among the available alternatives the one that involved “the least cost to society,” and to “set regulatory priorities with the aim of maximizing the aggregate net benefits to society.” In short, the executive order imposed a cost-benefit decision criterion on all agencies that their statutes did not provide otherwise.

The Reagan executive order specified in great detail the requirements for the "Regulatory Impact Analysis" (RIA) that had to accompany every major rule through a review process that was now run by the Office of Information and Regulatory Affairs in the Office of Management and Budget.  And it defined “major” broadly to include any rule with an annual effect on the economy of $100 million or more and every rule that could have a significant adverse impact on competition, employment, investment, productivity, innovation, or international trade. Furthermore, the executive order gave OMB complete discretion to designate any rule as "major" and to waive the RIA requirement for any major rule.

Unlike the Carter executive order, E.O. 12,291 required the agencies to use quantitative cost-benefit analysis. In addition, if the agency was unable to reach the executive order's substantive goals (for example, if its statute dictated a different result), the RIA had to explain why it could not do so.

OMB soon began to exercise its new review authority. During 1981, ninety-five regulations were either withdrawn by agencies or returned by OMB for reconsideration. In 1982, eighty-seven regulations were returned to or withdrawn by the agencies.  The rejection and withdrawal pace continued at about the same pace throughout the decade. 

President George H.W. Bush did not modify E.O. 12,291, and his administration left the Reagan regulatory analysis framework substantially intact. 

President Clinton rescinded E.O. 12,291 and replaced it with E.O. 12,866. Although it softened some of the quantitative requirements of E.O. 12,291, Clinton’s executive order, which remains in place, looks a lot more like President Reagan’s executive order than the executive orders that Presidents Carter and Ford promulgated. 

The “regulatory philosophy” of E.O. 12,866 is that before undertaking regulatory action, federal agencies should “assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating.” The executive order does, however, recognize that not all costs and benefits can be quantified, but the agencies should use quantitative measures to the fullest extent that quantitative techniques are available.

Under the executive order, the agencies “should select those approaches that maximize net benefits,” unless the statute requires a different approach. In addition, the agencies are supposed to tailor their regulations “to impose the least burden on society” consistent with obtaining the regulatory objectives.

Like the Reagan executive order, E.O. 12,866 requires agencies to prepare formal “regulatory impact assessments” detailing the costs and benefits of “significant regulatory actions,” which are defined much like “major” actions in the Reagan executive order. One addition is that regulations that raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the “principles” of good regulation set out in the executive order must also be subject to RIAs 

As with the Reagan executive order, E.O. 12,866 requires agencies to send significant regulations to OIRA for review. But it also requires OIRA review of all “significant regulatory actions,” including advance notices of proposed rulemaking and other preliminary actions. 

The executive order prescribes a strict 90-day deadline for OIRA review of significant rules, and allows OIRA to extend that deadline one time for an additional 30 days. As readers of CPR blogs know, OIRA has not complied with these strict deadlines in many important cases, including OSHA’s silica rule and FDA’s regulations implementing the Food Safety Modernization Act.

President George W. Bush was sufficiently confident that E.O. 12,866 would not be inconsistent with his deregulatory policies that he left the Clinton executive order in place. During his administration, OIRA was considerably more active in returning rules to EPA than during the Clinton years, but it did not modify the general format until late in the administration when President Bush issued Executive Order 13422 that extended OIRA review to guidance documents and required agencies to designate an individual to be the agency’s liaison to OIRA. That executive order was in effect only briefly until President Obama rescinded it soon after assuming office in 2009.

President Obama left E.O. 12,866 in place, and it was used quite aggressively by OIRA to slow down or return regulations that did not meet with the approval of the OIRA desk officers or other officials in the White House. 

In January 2011, President Obama supplemented E.O. 12866 with E.O. 13,563, which articulated new “general principles” of regulation. Among other things, agencies were required to justify any new regulation with a “reasoned determination” that its benefits justified its costs, tailor its regulations “to impose the least burden on society” that was consistent with the relevant regulatory objectives, and select the alternative that maximized net benefits.

The supplemental executive order also enhanced public participation in the regulatory process through online submissions and online access to germane regulatory documents, and required the agencies to conduct periodic “look backs” at existing regulations with an eye toward amending or withdrawing those that no longer met the cost-benefit decision criterion.

The foregoing history of E.O. 12,866 is a history of constantly increasing requirements that regulatory agencies justify their rules not by reference to the criteria specified in the statutes they were implementing, but by reference to a broadly applicable cost-benefit decision test of rationality. As the analytical demands on the agencies increased, the proportion of their limited budgets devoted to regulatory analysis grew and the speed with which they could react to newly emerging hazards through the rulemaking process diminished.

No one has undertaken a thoroughgoing cost-benefit analysis of E.O. 12,866’s regulatory analysis requirements. Indeed, proponents of the executive order would probably maintain that such an analysis would be impossible because of the many uncertainties surrounding the costs and benefits of preparing the analyses. Who knows, they will ask, how many billions of dollars in unnecessary and burdensome requirements were never promulgated because of OIRA’s insistence that agencies justify proposed rules by showing that their benefits outweighed their costs?

We may never know the answer to that question, but we do know that agencies spend hundreds of millions of dollars on regulatory analysis each year and that OIRA has either slowed down or forced the withdrawal of regulations that would have saved thousands of lives and protected priceless environmental treasures.  

The twentieth anniversary of Executive Order 12,866 is not a cause for celebration. It should be a cause for careful examination of the continued need for centralized review of protective federal regulations under a cost-benefit standard.

 



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