Reining in regulation?

the obama administration has dedicated 2009 to the most ambitious legislative agenda of any president in recent memory, from the economic stimulus package of the winter to this fall’s landmark bills overhauling the health care system and attacking global warming.

But 2010 may well turn out to be quite the opposite — one marked by cautious regulating — if Obama’s choice to be his administration’s top regulatory watchdog, Cass R. Sunstein, says anything about the president’s approach to carrying out and overseeing the new laws.

A law professor at Harvard, founder of its Program on Risk Regulation, and an outspoken advocate of weighing the cost of regulations against their benefits, Sunstein is regarded by all as a brilliant scholar.

But he’s also been an equal opportunity provocateur, irritating liberals by questioning the efficiency and even constitutionality of environmental and health-and-safety regulations while annoying conservatives by endorsing more activist government approaches to societal problems.

So both sides are eager to see how Sunstein’s academic work guides him as the regulatory czar at the Office of Management and Budget (OMB), where he has the power to delay, edit, or even kill regulations proposed by government agencies.

“OMB has been used since the Reagan administration as a political arm of the White House, so it will be very interesting to see what role Sunstein plays,” says Rick Melberth, director of federal regulatory policy at OMB Watch, an advocacy group in Washington that favors tougher regulation.

Sunstein’s most recent book, the best-seller Nudge: Improving Decisions About Health, Wealth, and Happiness (see CW review), co-written with University of Chicago economist Richard H. Thaler, shows how he doesn’t fit neatly in an ideological box. It advocates a “libertarian paternalism” in governing that would allow citizens as much free choice over their affairs as possible, with a good dose of regulation aimed at steering them in healthy, productive directions.

Liberals are most troubled by Sunstein’s devotion to cost-benefit analysis as a means of ensuring that regulators are held accountable for the effects of the rules they write. Many are highly skeptical of cost-benefit analysis as a regulatory principle because they see the equation as irredeemably compromised toward the cost side by industry lobbying. They would prefer to see OMB grant more deference to the government agencies that propose new regulations, playing more of a coordinating role than that of a devil’s advocate.

“The problem with the cost-benefit method is, the inevitable result is that the benefits of environmental regulation get vastly underestimated,” says Amy Sinden, a professor of law at Temple University in Philadelphia and a board member of the Center for Progressive Reform, a group of academics that supports strict health, safety, and environmental regulation. “It’s so hard to quantify the value of a human life, of human health and environmental ecosystems, and so it’s no accident that industry has consistently pushed for more cost-benefit analysis.”

Environmentalists are worried too. “The risk is you could have people who understand the cost of everything and the value of nothing calling the shots,” says Frank O’Donnell, president of Clean Air Watch.

Some conservatives, meanwhile, fear that Sunstein’s version of cost-benefit analysis will ultimately put more weight on the benefit side of the equation, and that he will therefore be a more activist regulator than they would prefer. Republican senators held up Sunstein’s appointment for months, for example, because he’s argued in his academic writing on behalf of animal rights. In general, however, conservatives have been more receptive to Sunstein’s appointment than liberals have been because they expect that he will institutionalize a strong role for OMB, essentially carrying over George W. Bush’s policy of placing the office at the center of the regulatory review process.

“The biggest fear that I had with the new administration was that the system of regulatory review would be eroded, and Sunstein helps ensure that doesn’t happen,” says James L. Gattuso, the senior research fellow in regulatory policy at the Heritage Foundation, a conservative think tank in Washington.

a massachusetts native, Sunstein, 55, graduated from the Middlesex School in Concord, Harvard College, and Harvard Law School. He spent 27 years as a professor at the University of Chicago Law School, where he met and befriended a fellow professor, Obama, before joining Harvard’s faculty last year. He has taken a leave of absence from Harvard to work in Washington during the 2009-2010 school year.

Sunstein’s specialty is the field of “law and behavioral economics,” studying how to write laws and regulations to shape sometimes irrational human behavior. After hiring Sunstein in February 2008, then-Harvard Law School Dean Elena Kagan — now the Justice Department’s top lawyer — called him the “pre-eminent legal scholar of our time — the most wide-ranging, the most prolific, the most cited, and the most influential.”

In his confirmation hearings before the Senate earlier this year, Sunstein tried to reassure worried Democrats that he would not stamp out new rules simply because of their costs. Sunstein said he would first seek to carry out Congress’s legislative mandates, consistent with Obama’s priorities. But he added that he would look to “institutionalize the notion of looking before you leap so that when the government is starting with a regulation, whether it involves homeland security, education, energy, or anything else, there’s some sense of what the consequences are likely to be.”

Such a cautious approach worries Sinden and her colleagues. After Sunstein’s nomination earlier this year, the Center for Progressive Reform released a white paper noting that Sunstein’s desire to know the consequences of regulation before taking action could result in an unnecessary reticence to regulate.

Sunstein, they pointed out, has questioned the constitutionality of the law governing the Occupational Safety and Health Administration, arguing that the 1970 health and safety law protecting workers on the job gives too much congressional authority to the executive branch. He also has suggested that instead of incurring the high cost of reducing carbon emissions to deal with global warming, it might be more efficient to establish a fund to help future generations deal with problems associated with climate change.

Liberals would have preferred that Obama had chosen another former Massachusetts denizen, Lisa Heinzerling, for the head of OMB’s Office of Information and Regulatory Affairs. Instead, Obama named her to the top job at the Environmental Protection Agency’s Office of Policy, Economics, and Innovation, where she will have to work with Sunstein on any new rules dealing with global warming.

A former member of the Center for Progressive Reform and a onetime assistant attorney general in Massachusetts, Heinzerling wrote a 2007 legal brief for the state that convinced the Supreme Court to find that the Environmental Protection Agency did have authority to regulate greenhouse gases. She has long argued that it is better to err on the side of regulation when clear cost-benefit data is not available.

But Sunstein thoroughly rejects this “precautionary principle,” and he has locked horns with Heinzerling before. In 2004, for example, he called a Heinzerling book that makes the case for precautionary rulemaking “worse than unhelpful” and “utterly incoherent.”

Liberals’ worst fear is that Sunstein will follow in the footsteps of John D. Graham, a professor of public health at Harvard before joining Bush’s OMB and the founder of Harvard’s Center for Risk Analysis. From 2001 to 2006, Graham helped turn the OMB’s Office of Information and Regulatory Affairs into a powerful enforcer of the Bush administration’s anti-regulatory orthodoxy. He was credited — or blamed — with slowing or killing a variety of health, safety, and environmental rules. He ordered the EPA to revise rules aimed at restricting farm runoff, for example, and challenged the agency’s work on clean air regulation.

Graham says he sees Sunstein as the latest in a long line of Harvard faculty and students who’ve populated OMB, starting with Chrisopher DeMuth, a former Kennedy School professor who went on to head the Office of Information and Regulatory Affairs under President Reagan, and later led the American Enterprise Institute, one of Washington’s most prominent conservative think tanks. Graham calls Sunstein “superbly qualified” to run OMB’s regulatory arm.

Meet the Author

Shawn Zeller

Washington Correspondent
In his Senate testimony, Sunstein tried to play down any similarities with Graham. “My own approach to cost-benefit analysis is inclusive and humanized,” he said. “What I’ve emphasized in my academic writing is that cost-benefit analysis shouldn’t put regulation in an arithmetic straitjacket. That there are values — moral, distributional, aesthetic, and otherwise — that have to play a part.” Indeed, he added, there are “limits” to “purely economic approaches to evaluation of costs and benefits.”

In policymaking, the ideal scenario, Sunstein argues in Nudge, is to find regulations that are efficient economically and create good incentives for people to lead healthy, productive lives. A prime example, he writes, is the Earned Income Tax Credit, which provides government funds to poor people based on how much they earn. A diverse array of conservatives and liberals support the program over more traditional welfare handouts because it alleviates poverty while rewarding work. But while such examples clearly exist in narrow cases, many liberals worry that the Nudge philosophy, untested in larger matters, may come up short when it comes time to write rules governing new health care or global warming laws.