1.Identifying the Problem: The First Step in the Regulatory Process Jerry Ellig Senior Research Fellow Mercatus Center at George Mason University Arlington, Virginia USA

2. Executive Order 12,866 (b) The Principles of Regulation (1) Each agency shall identify the problem that it intends to address (including, where applicable, the failures of private markets or public institutions that warrant new agency action) as well as assess the significance of that problem. (2) Each agency shall examine whether existing regulations (or other law) have created, or contributed to, the problem that a new regulation is intended to correct 3. If you dont know where youre going, any road will take you there. --George Harrison 4. Reason #1: Determine whether regulation is necessary USDA catfish regulation Does the problem exist? Is it widespread or minimal? Is the problem likely to persist in the future? 5. In this case, no problem! 6. Well-articulated problem DOI bird hunting regulation Tragedy of the Commons Declining populations pre-treaty 7. Reason #2: Understand root cause to develop an effective solution Standards to Prevent Prison Rape (proposed 2011) RIA quantifies and monetizes cost to victims No systematic root cause(s) identified Advisory commission report consists of anecdotes and best practice recommendations No evidence presented showing that the best practices reduce incidence of prison rape where they have been implemented 8. Good root cause analysis HUD RESPA mortgage disclosure (2008) Problem: Information asymmetry One cause: Poorly-designed GFE disclosures Solution: Revised, market-tested GFE disclosures 9. Reason #3: Develop alternatives that target the problem FDA proposed animal food rule (2013): $13-17 million benefits, $87-129 million costs Apply to pet food only: $12-15 million benefits, $6-9 million costs 10. Market failures Monopoly/market power Externalities Public goods Information asymmetries Note: These may not be permanent 11. Failures of public institutions Prior regulation creates the systemic problem Lack of clarity or litigation regarding a prior regulation Inefficient management of public resources or programs Other levels of government may lack incentives to fix, or may encourage, market failures 12. Other compelling public need Fairness/equity Securing a fundamental right (civil rights, privacy, individual liberty) Paternalism Just plain redistribution 13. OMB Circular A-4 For other interventions, you should also provide a demonstration of compelling social purpose and the likelihood of effective action. Although intangible rationales do not need to be quantified, the analysis should present and evaluate the strengths and limitations of the relevant arguments for these intangible values. 14. 1) Six criteria from E.O. 12866 and Circular A-4 2) Proposed economically significant regulations 3) Team of economists 4) Read RIA and entire Federal Register preamble 5) Qualitative evaluation with numerical scores 6) 2008 to present 15. Evaluation Scale 5 Complete analysis of all or almost all aspects, with one or more best practices 4 Reasonably thorough analysis of most aspects and/or shows at least one "best practice" 3 Reasonably thorough analysis of some aspects 2 Some relevant discussion with some documentation of analysis 1 Perfunctory statement with little explanation or documentation 0 Little or no relevant content 6 criteria 0-5 points each 16. Average Scores by criterion (2008-2012) Criteria Score* Systemic problem 2.1 Alternatives 2.8 Benefits (or other outcomes) 3.2 Costs 2.5 Use of analysis 2.2 Cognizance of net benefits 2.5 * Scores out of 5 possible points 17. Average Report Card scores, systemic problem 18. Does the analysis identify a systemic problem? 19. Coherent and testable theory 20. Empirical evidence 21. Uncertainty about existence/extent of problem 22. Solutions Include analysis of the systemic problem in any legislative mandate for Regulatory Impact Analysis Require public comment on agencys analysis of the problem before the agency writes the proposed regulation Inquire about this topic when conducting agency oversight Ensure this analysis is done before passing legislation that mandates a regulation 23. Why does it matter?