Virginia Charts a Path Forward on Regulatory Modernization

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New agency sets example for state and federal agencies to follow in analyzing regulatory costs and benefits.

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With inflation still at a level not seen in decades and the U.S. economy teetering on the brink of recession, policymakers have increasingly begun to look for ways to jump start the economy without further driving up prices. One area that too often goes overlooked but that is drawing more attention from both sides of the aisle is regulatory modernization.

The challenge, of course, is determining which regulations are unduly burdensome and which are critical to preserving public health and safety. The way regulators typically make that determination is by performing a cost-benefit analysis. Key questions in this analysis include: What social benefits does a regulation create? What costs are associated with it? Who reaps those benefits and bears the costs? Has the agency chosen the best regulatory alternative?

Although these questions may sound pretty simple, answering them has become more complicated over time. At least at the federal level, cost-benefit analyses can run into the hundreds of pages and are replete with economic jargon that is unintelligible to anyone other than PhD economists who specialize in regulatory issues.

There is, however, another approach. And Governor Glenn Youngkin of Virginia is leading the way, having recently created a new centralized regulatory review body known as the Office of Regulatory Management (ORM). ORM’s recent successes suggest an innovative path forward for federal and state regulators alike.

Economic analysis of regulations at the federal level dates back to the Johnson Administration. The modern system slowly emerged over the ensuing decades, with President Clinton’s Executive Order 12,866 creating the framework that continues to exist today at the federal level.

This centralized approach to regulatory review has improved the quality of regulations immensely over the past three decades. But the system has a handful of major gaps.

Independent regulatory agencies such as the Securities and Exchange Commission and Federal Communications Commission are not required to do cost-benefit analysis under Executive Order 12,866. All other agencies are only required to do a full cost-benefit analysis on rules imposing $100 million or more in annual costs. Even when a full cost-benefit analysis is required, agencies often fail to calculate the monetary benefits and costs.

At the same time, as noted previously, federal analyses already run into the hundreds of pages, making it difficult for everyday citizens and even corporations and interest groups to participate meaningfully. This has led some to suggest that less may actually be more. Professors Christopher Carrigan and Stuart Shapiro, for example, have argued for “back of the envelope” regulatory analyses that are much shorter and simpler but allow key stakeholder groups to weigh in early, before the agency has already made up its mind.

Most state governments also impose by statute some form of cross-cutting economic analysis requirement like that imposed federally under Executive Order 12,866. And unlike the federal economic analysis requirement, state requirements to conduct cost-benefit analysis often apply to all state regulations.

At the same time, virtually no state has created the equivalent of the federal Office of Information and Regulatory Affairs (OIRA). State agencies are often tasked with performing one or more of the key elements of a regulatory impact analysis, but what they then do with that analysis is entirely up to them. The fact that state agencies often perform mediocre economic analysis therefore should not come as a surprise.

Enter Virginia’s Office of Regulatory Management.

Shortly after taking up residence in the executive mansion, Governor Youngkin charted out a new path that combined the best of the federal and state worlds. By signing Executive Order 19 in June of last year, he implemented within the state an entirely new and innovative approach to regulatory review.

Key features of the new approach include requirements that: (1) all regulations and guidance documents be reviewed by ORM; (2) agencies use an ORM Economic Review Form that is short and simple, seldom running more than 10 pages when completed; and (3) agencies consider the economic effects of their regulations on specific groups, including local governments, families, and small businesses.

ORM recently issued a manual to help agencies conduct the required analysis. It is intentionally designed for non-economists and is written in non-technical language that is accessible to Virginia regulators—almost none of whom have any advanced training in economics—as well as to private citizens.

By requiring a review process for virtually all regulatory instruments, whether they are styled as “regulations” or “guidance documents,” Virginia ensures that regulators are mindful of the economic effects of all of their actions rather than only those that exceed a dollar threshold.

For many regulations, the economic effects are very straightforward and only require a few sentences to describe, thereby minimizing the time agencies spend conducting the analysis. But even relatively minor regulations or guidance documents can often have significant effects on small businesses and other stakeholders, and it is therefore important to ensure that regulators consider these effects in every case.

Furthermore, Executive Order 19 also requires agencies to consider at least three alternative approaches, which ensures that agencies give thought to the full range of possible options and select the one that is most attractive.

At the same time that Executive Order 19 promotes greater thoughtfulness about regulation, the simpler process not only saves time for regulators but also makes it far easier for stakeholders to weigh in meaningfully. This open and transparent process is especially valuable for ensuring that the Virginia citizens who often do not get a chance to participate in the process have a seat at the table.

Governor Youngkin’s innovative new approach to regulatory modernization has already led to calls for other states to adopt similar reforms. And as the federal government grapples with ways to tamp down inflation and design a regulatory system that is more responsive to the needs of underrepresented groups, it also would be well served to consider the innovations coming out of Richmond.

Virginia’s ORM is eager to work with any regulatory body at the federal, state, or local level—or in another country—that is interested in adopting similar reforms or learning from Virginia’s experience.

Reeve T. Bull is the Deputy Director of the Virginia Office of Regulatory Management.