Regulation Czar: Low Profile, Big Influence

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More for Less

There are three areas where we predict Sunstein will leave his mark. First, he can push to reform regulatory programs to drive innovation and deliver better results for less money. For example, the Environmental Protection Agency strictly regulates water that comes from a "point source" (say, at the tail end of a factory) but largely ignores "nonpoint source" water pollution (like noxious runoff from pig or chicken operations). Many companies spend large sums complying with point source regulations, while we can achieve equal reductions from nonpoint sources for much less. Instead of pushing to eke out additional small-emissions reductions from regulated companies (at great cost), why not give firms the flexibility to meet permitting requirements by funding projects that reduce the same pollutant in farm runoff? We could even create a more sophisticated trading mechanism based on current pollution into a lake or river that targets dollars at the most harmful emissions for that body of water.

Second, Sunstein can balance the OIRA review so that it does not water down strong regulation. At its inception, during the Reagan Administration, OIRA was conceived as a way to tamp down regulation and reduce the compliance costs of industry by reining in agencies. The assumption was that there was too much regulation, and we needed to scale back to give the economy some breathing room. But Sunstein knows that strict environmental and public health regulations can often increase well-being without drowning businesses. When agencies fail to act, from inertia or special-interest pressure, it takes a toll, from cancer deaths to investment dollars down the drain.

Sunstein is likely to institute reforms at OIRA to force agencies to adopt strong regulation when it can improve Americans' lives. He can do this by removing biases that underestimate regulatory benefits and overestimate regulatory costs, ensuring that deregulation is subjected to as strict scrutiny as regulation, and counting the positive as well as negative side effects of regulation. A newly retooled OIRA could push agencies on everything from toxins in the workplace to speeding up the pace of climate change regulation.

Finally, Sunstein can expand OIRA review to new areas. OIRA has traditionally focused on environmental and public health agencies, but there are now major regulatory actions in many other areas. In the early part of the Obama Administration, there will likely be significant new rules governing the financial sector. Sunstein's writings on behavioral economics, which recognizes that people, and even big sophisticated firms, do not always behave rationally, show openness to a whole host of options to combat market irrationality—from direct regulation of derivatives to increasing capital requirements. While he will be focused on ensuring that these regulations do not thwart an economic recovery, he will also be looking to avoid a repeat of the bad decisions that led to the current financial collapse.

Sunstein has a difficult task ahead. As the recession continues, his job will be to provide the economic backbone for Obama's regulatory agenda. When job losses and foreclosures are at the top of everyone's minds, he will need to show that it is in our national economic interest to pursue smart rules to protect the environment and public health.

Revesz is the dean of New York University School of Law, and Livermore is the executive director of the Institute for Policy Integrity.