Thursday, August 18, 2016

Richard Epstein from the US: Our Regulator-In-Chief

Now that we are in the final lap of President Barack Obama’s presidency, the debate has begun over his historical legacy. The New York Times is contributing to that debate with a six-part series assessing his presidency called “The Obama Era.” The first article in that series, “Once Skeptical of Executive power, Obama Came to Embrace It,” argues that Obama is, in the journalists’ words, our “Regulator in Chief,” having issued about 50 percent more major orders than his predecessor George W. Bush. 

Though the article uncritically embraces Obama’s statist policies, the President’s major initiatives on environmental protection, drugs, health care, and labor markets have been both more far-reaching and socially destructive than those of his predecessor.

What spurs the president to action is his moral certitude. He knows what is best for the country. To be sure, he disclaims any intention to regulate “just for the sake of regulating.” But there are, he believes, many good reasons to regulate. As he says, “there are some things like making sure we’ve got clean air and clean water, making sure that folks have health insurance, making sure that worker safety is a priority—that, I do think, is part of our overall obligation.”

Unfortunately, his bold statement reveals a deep misunderstanding of policy and the role of regulations in improving society. First, the mission of “making sure” that the right outcomes occur is beyond the power of any regulator, who has limited resources to face a multitude of potential problems. Establishing a set of coherent priorities requires an awareness of the necessary trade-offs that have to be made along the way.

Sometimes, for example, it is possible to develop clear rules, like traffic rules for public highways. But that approach misses the point in dealing with water or air pollution. The question here is not a binary one of whether or not we have clean air or water. The question is just how clean the air and water ought to be in a sensible system of regulation. Obama’s use of absolutes carries with it the implicit notion that we should push this goal to its natural limit. But the better approach goes first after low-hanging fruit, without trying to drive pollution levels close to zero. Sooner or later, often sooner, the costs at the margin start to outstrip the benefits, at which point the rational approach is to pull back.

Nonetheless, the Obama administration works the opposite way, by making extravagant assumptions in its cost/benefit analysis of regulations. For the President, the preferred strategy is to increase the estimates of benefits and to lower the costs of compliance, at which point the unthinkable becomes the inevitable. The writers of the New York Times piece note with evident approval that the President uses relatively high estimates of the “social cost of carbon” to justify very stringent regulations on power plant emissions. It is just that logic which led the Obama administration to use similar calculations for the “social cost of methane” to justify sharp restrictions for oil and gas drilling that go over the top, as well demonstrated by policy analyst Paul Driessen writing for The Committee for a Constructive Tomorrow.

The EPA starts with the assumption that US releases will have some measurable impact on the environment. But the initial step should surely be to put the United States into global perspective where 17% of pollution “is from energy production and use; 26% comes from agriculture, landfills and sewage; and the remaining 57% is from natural sources.” The American contribution to global methane production is about 9 percent, of which about 30 percent comes from oil and gas drilling. The industry, moreover, has made substantial progress in reducing emissions from fracking, thereby reducing the need for regulation. Methane is, of course, just another word for natural gas, which is itself a valuable fuel, so strong incentives already exist for potential polluters to capture it.

A regulation cannot reduce the total level of emissions to zero. So the question is, why bother when oil and gas operations in the United States produce only 0.000004% of atmospheric methane? At most we can expect only a miniscule reduction of global temperature increases on the unlikely presumption that regulations could cut methane emissions in half, assuming that other distortions are not introduced into the system.

This same frame of mind occurs over and over again. To give but one other example, the mandate of the Food and Drug Administration is to make sure that only safe and effective medicines reach the market. Here, the case for regulation is even weaker than it is for pollution because medicines are not forced down the throats of unwitting patients, but are taken willingly under physician supervision. The FDA may have its doubts about the prescribing practices of physicians, who, as required by good medical practice, routinely prescribe off-label uses of approved drugs for patients—that is those uses not approved by the FDA. Nonetheless, the FDA’s constant refrain that detailed clinical trials are needed to protect unwitting patients from dangerous products sounds hollow. Worse still, the FDA uses an antiquated risk/reward approach that no sane person would apply in his or her own life. People in need want to know only whether they are better off taking a new and risky therapy than not. They do not care about the inability to document the safety or effectiveness of the drug except to the extent that it bears on their choice. The FDA clings to the outdated notion that long-term clinical trials supply the gold standard for evaluating new and controversial therapies.

Its overzealous approach has cost many lives and created many tragic situations, including the current impasse where the FDA has denied approval for drugs dealing with Duchenne’s muscular dystrophy, by slow-walking the drug eteplirsen through its endless approval process. Yet the cost/benefit analysis is a no-brainer. Without the drug, the boys who are diagnosed with the disease will suffer serious paralysis leading to death. With it, the production of the missing protein, dystrophin, gives them a chance of leading a more normal and healthy life. There is no downside. Yet the President has not issued a single executive order that has broken the FDA stranglehold one new medicines. Why? Because he does not fully consider the risks of excessive regulations and the problems those regulations create, including death. Sadly, none of this is mentioned in the New York Times piece.

Presidential blindness also extends to the health care system. What does it mean to insist that “folks have health insurance”? Universal insurance is a pipe dream, so the question is how best to improve the numbers. Removing endless mandates is a good first step. But the Obamacare health care exchanges are burdened with additional requirements that have led to widespread and repeated accounts of their failure. Yet there was not a word of this when Obama lauded the “progress” in health care brought about by his legislation in a recent “special communication” in JAMA, a prestigious medical journal. Nor did he address the adverse selection and moral hazard problems that are breaking the system. More mandates spell more trouble. Only deregulation can open nationwide markets to low-priced care. But for the man who wields the executive pen, the failure to make the exchanges work will be regarded as proof-positive that some government option is needed to fill the gap.

Finally, the President’s orders have done nothing good for the workplace. Yet the Times fails to critically evaluate the many initiatives of the Obama administration in the areas of wages and hour regulation. Instead, it lauds the increase in overtime eligibility brought about by changes in the wages and hour laws, without asking once how these rules will affect established patterns of business in such key areas as the gig economy, tech startups, university laboratories, and ordinary business. In some industries, the hour is a meaningless measure of productivity. In others, increasing the number of workers eligible for worker’s compensation requires many firms to reengineer key parts of their business. The implicit assumption of the President—and the Times—is that more regulation is better, without taking into account the administrative costs needed to put the new schemes into place, or the increased efforts of compliance.

Similar objections apply to the effort of the President to increase by executive order the minimum wage paid to employees of government contractors. It sounds like a humane policy in theory, but it’s important to ask if these high minimum wages will do good, given the evident risk that they will drive up unemployment, especially in teenage and low skill markets. The Times cites the claim of government economist Betsey Stevenson that higher minimum wages will reduce turnover and thus improve overall production. Then it adds, anecdotally, that Noble Prize–winning economist George Akerlof and his wife, Federal Reserve Chairwoman Janet Yellen, found that they got better babysitting care when they paid a premium over market.

But these time-worn arguments get matters exactly backwards. If higher wages will increase productivity, as they sometimes do, firm managers will not miss the point and will increase wages themselves. The correct government response therefore is to leave matters as they are, because no one in government knows on a firm-specific basis that a $15.00 minimum wage will improve workplace performance. Indeed, if the minimum wage is set too high, the present generation of parents would be less likely to pay their babysitters those premium wages once the base is artificially raised. It is just astounding that major economists concoct dreamy policies that are based on the premise that omniscient government officials are needed to correct the assumptions of the fools that populate ordinary businesses.

The damage done by each of these various initiatives helps explain the persistent anemic growth rates in the American economy. We need a president who has the humility to question his or her own assumptions. Whether we will get one seems highly unlikely given the depressing performance of both leading candidates. 

Professor Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.

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