Regulation ad Absurdum

Tuesday, May 17, 2011
an image
Image credit: 
Barbara Kelley

Shortly after he was elected president, President Barack Obama promised substantial budget cuts. He said officials would "go through our federal budget—page by page, line by line—eliminating those programs we don't need, and insisting that those we do operate in a sensible, cost-effective way." But within two years, the profligate spending of his administration and the Pelosi-Reid-led Congress have bloated federal departments and agencies to unprecedented levels.

Nowhere has this out-of-control spending been more marked than at the federal regulatory agencies. The "gatekeeper" agencies, such as the EPA, USDA, and the FDA, which must approve innovative products and technologies before they come to market, received especially generous increases in funding. Yet, instead of spurring greater efficiency and improved performance, the agencies’ additional revenues have caused "regulatory creep"—the arrogation of additional, extra-statutory responsibilities—and more aggressive assertion of their powers in the form of new regulations. These ever-increasing, stultifying regulations squander public- and private-sector resources, stifle innovation, slow economic growth, and prolong high unemployment levels.

Regulations are hampering economic growth
Illustration by Barbara Kelley

Stung by constant criticism that his administration’s policies were anti-business, in January Obama announced a government-wide review of federal regulations to restore "balance" by eliminating those "that stifle job creation and make our economy less competitive." He emphasized this again in his State of the Union Speech, referring to "rules that put an unnecessary burden on businesses."

Either the president has little grasp of the nuances of federal regulation or he is just politicking in preparation for the 2012 election. For one thing, his directive merely reinforces an executive order President Bill Clinton signed in 1993 that has been applicable to the Obama administration since it assumed office.

But those in the Obama administration seem to have ignored the executive order. According to economist Susan Dudley, who during the previous administration headed the Office of Management and Budget office that oversees and coordinates executive branch regulations, "Over the first two years of [Obama’s] term, the federal government issued 132 economically significant regulations (defined as having impacts of $100 million or more per year). That averages out to 66 major regulations per year, which is dramatically higher than the averages issued by President Clinton (47 per year) or President Bush (48 per year)." Moreover, she notes that the Obama administration’s future Regulatory Agenda, released in December, does not indicate any slowing. Quite the opposite, in fact.

In order to improve the federal regulatory apparatus, there are two complementary factors that need to be addressed: the policies themselves and the people who formulate and administer them. In other words, personnel choices are policy choices, and the president and his advisers have significant control particularly over the former. Most important federal government business is conducted not by cabinet-level officials, but by the thousands of bureaucrats at the next level. These officials occupy senior positions at the myriad departments and agencies and perform pivotal day-to-day decision- and policymaking. They are critically important, especially at the gatekeeper agencies, which must approve products such as pharmaceuticals, pesticides, and genetically engineered plant varieties before they can be marketed.

Thanks to the federal government’s hyper-regulation, private business investment has fallen by 10% since 2008.

Many of these senior decision-makers adhere to a hyper-regulatory, damn-the-science philosophy. It resembles the Europeans’ innovation-busting "precautionary principle," the view that until a product or activity has been definitively proven safe, it should be banned or at least smothered with regulation. Policy by policy, decision by decision, Obama’s appointees are damaging the nation's competitiveness, ability to innovate, and capacity to create wealth.

Regulation-watchers in academia and the unfortunates in regulated industries could compile a lengthy list of appointees who should be shown the door. Their departure could be accomplished, literally, overnight, but let us not forget that they were selected in the first place because they share the regulatory philosophy of the president and the ideologues who populated his transition team.

As to the specific regulatory policies that are unscientific, overly burdensome, and inhibit innovation, there is no shortage of them. The medical devices industry is particularly beleaguered. The FDA has cranked up the stringency of regulation making compliance vastly more expensive. For decades many devices have been approved via a fast-track pathway called 510(k), which is designed for products that are similar to earlier products, known as predicate devices. Although, the link between the new product and the predicate device can sometimes be tenuous, about 3,500 devices are approved annually via this mechanism, with very few problems. But the FDA has recently made it clear that qualifying for the 510(k) pathway is about to become more difficult and that more data will need to be obtained and submitted to regulators for the standard pathway. These new requirements threaten innovation across the industry, especially at a time when financing is hard to obtain. Unlike the drugs sector, many device makers are small and financially fragile.

These overly regulated companies have responded by voting with their feet, moving R&D and manufacturing offshore. An analysis by PricewaterhouseCoopers confirms that the United States' lead in medical device development (a $120 billion industry) is eroding. Device developers are taking their R&D, manufacturing, and applications for regulatory approval to Europe and even to developing countries such as India, Singapore, Brazil and China. In 2010, total U.S. venture capital investing (across all sectors) increased 19 percent while investment in medical devices fell 9 percent.

Other examples of burdensome regulations come from the EPA. In January, the agency finalized a regulation that subjects dairy producers to the Spill Prevention, Control and Countermeasure program, which was created forty years ago to prevent oil discharges in navigable waters or near shorelines. But once the EPA’s "scientists" discovered that milk contains "a percentage of animal fat, which is a non-petroleum oil," they decided that farms and facilities that make milk-derived products must prepare emergency response plans and build "containment facilities" to prevent. . . what, exactly?

The medical devices industry is particularly beleaguered.

Equally wrong-headed but far more damaging is the EPA and USDA’s treatment of genetically engineered plants, animals, and microorganisms—a prototypic example of "rules that put an unnecessary burden on businesses," to quote the president, and on the scientific research community as well.

The federal regulatory approach to field trials and commercialization of genetically engineered crops, in particular, has been roundly condemned by the scientific community for more than 20 years. Regulators treat these important products as though they pose uniquely worrisome risks, in spite of a long-standing consensus in the scientific community that the newer techniques are essentially an extension, or refinement, of the more primitive ones. Federal regulation discriminates against the most precise and predictable techniques for genetic improvement, requiring endless, redundant case-by-case reviews of plants crafted with those techniques. (By contrast, the testing and commercialization of similar seeds and crops made with less precise, less predictable techniques is often subject to no regulation at all.) In order to implement this gratuitous regulation, the USDA has created a massive bureaucracy ( whose elimination would both reduce the department’s budget and stimulate private sector R&D.

The feds’ approach to biotech oversight violates two fundamental principles of regulation: that similar things should be regulated in similar ways, and that the degree of oversight should be proportional to the expected degree of risk. Regulators have, in fact, turned the second principle on its head, with more precisely and predictably crafted products subjected to the greatest regulation.

The biotech regulation muddle illustrates the link between personnel and policy: Carol Browner, who until recently oversaw all federal energy and environmental policy for the White House, finalized the offending EPA biotech regulations as the EPA head during the Clinton administration. Predictably, there was no way she would admit earlier errors and agree to needed reform. And Kathleen Merrigan, the deputy secretary of agriculture, boasts decades of anti-biotechnology, radical pro-organic ideology and actions.

Overly regulated U.S. companies have responded by voting with their feet, moving R&D and manufacturing offshore.

So who might evaluate and recommend the needed changes on biotech regulation? A blue-ribbon panel akin to the president's deficit-reduction commission would be an option—although it must be noted that the medicine prescribed by that distinguished group was regarded by the president as too strong, so its advice has been ignored.

If the Obama team really was, in the president’s words, "seeking more affordable, less intrusive means to achieve the same ends—giving careful consideration to benefits and costs," it could start with reforming biotechnology regulations. To be clear: the needed reforms would not in any way compromise safety; they would merely correct gratuitous regulation of the kind that the president called "just plain dumb."

The most important government reform would be to substitute the current process-oriented regulatory procedures with a more risk-based approach. Just because genetic engineering techniques have been used to craft a new plant variety does not imply that a field trial or commercial product needs to be subjected to case-by-case review.

Even when there is a genuine commitment to regulatory reform, it isn’t easy to accomplish by altering established policies. According to a 2007 report by the Government Accountability Office, Congress’s research and auditing agency, when bureaucrats conduct reviews they usually conclude that the current rules should be kept. Moreover, many changes in federal regulation require a formal process of rulemaking that often takes years.

Also, aggressive personnel and policy changes could boost the economy in ways that actually reduce federal spending. With personnel housecleaning and prudent, relatively moderate changes in policy we can lighten the drag caused by excessive, unscientific regulation and encourage businesses and investors to get back into the game. (Even as the nation has emerged from the recession, aggregate private business investment has fallen by 10% since 2008.)

Instead, the Obama administration has continued on a course of profligate spending and wasteful, unscientific, nanny-state policies that damage the nation’s economy and diminish consumer choice. No matter where the economic growth, unemployment, and consumer confidence figures are by the fall of 2012, they will be far less robust than they would have been if the Obama administration had been wiser, more frugal, and more appreciative of scientific and free-market principles.