II. When Regulations Go Wrong

Regulation can confer advantages on certain groups at the expense of others. Well-connected or well-organized interests may improperly benefit from regulations when they dominate the rulemaking process and shape regulations to their advantage. Even when developed with the best of intentions, moreover, regulations can have unintended and negative consequences that perversely harm, rather than protect, the public. Below are examples illustrating both results.

A. Dying patients denied promising treatment

It was early March 2001 when doctors told twenty-one-year-old Abigail Burroughs that they had exhausted conventional options for treating her cancer. However, she was told, a new drug, Erbitux, might save her life . . . the problem was that the U.S. Food and Drug Administration (FDA) had not approved its use.6

Abigail, with her father, Frank, and family and friends, embarked on a life-or-death effort to gain access to Erbitux. First, the drug companies insisted they could not provide the drug without FDA approval. So Abigail and her supporters petitioned Congress and gained widespread and sympathetic media coverage. This did not budge the FDA. The FDA housed great expertise, but its regulatory process emphasized caution in every instance, even when a drug may be a patient’s last chance. The FDA’s monopoly power over drug approval allowed it to proceed at its own unhurried pace and ignore special circumstances.

Abigail died on Saturday, June 9, 2001. By the time the FDA finally approved Erbitux in February 2004, almost 179,000 people like her had died from a similar, treatable form of cancer.7

Sadly, Abigail’s story is not unique. A few years ago, Ronald Trowbridge and Steven Walker explained in The Wall Street Journal what they called the “tragic standard for loss of life” set by the FDA through the inefficiencies inherent in its cumbersome drug approval process.8 They documented twelve examples of drugs produced to treat life-threatening conditions, all eventually approved by the FDA, that were available only to the limited number of patients enrolled in clinical trials. Had these twelve drugs “been available to people denied entry to clinical trials” by the FDA, “it might have helped more than one million mothers, fathers, sons and daughters live longer, better lives.”9

At least in principle, the FDA does offer seriously ill patients limited options for obtaining access to unapproved medicines. For example, some patients may be able to gain access to experimental treatments by enrolling in a clinical trial. But for many conditions, large numbers of patients are not eligible to enroll in a clinical trial for reasons as varied as their age, physical condition, severity or progression of the disease, co-morbidity and risk factors, and countless other criteria.10

Through FDA’s expanded access and Treatment Investigational New Drug programs—more familiarly known as “compassionate use”—patients with serious or immediately life-threatening illnesses for which there are no approved treatment options may be given permission to use an experimental drug outside a clinical trial.11 However, the procedures and requirements for being granted a compassionate use exemption are complex and burdensome, which makes it difficult for patients and their doctors to apply. In addition, limitations on drug manufacturers, including restrictions on how much they can charge patients, often make the companies reluctant to participate.12 And though the overwhelming majority of patients who manage to navigate the process are eventually granted permission,13 it often comes too late for the drug to have any effect in terminally ill patients.14

Under pressure from Congress, the news media, and the public, the FDA has taken steps in recent years to streamline its expanded access application process and reduce approval times.15 And in May 2018, Congress enacted and President Trump signed into law the Right to Try Act, which is intended to provide another pathway for granting seriously ill patients access to unapproved medicines.16 But as of this writing, it is too soon to know how well either of these reforms will work in practice.

Even if they do work well for some patients, thousands of others will continue to suffer from the FDA’s extreme risk aversion and its demands for lengthy, burdensome reviews. For example, in March 2013, an outbreak of meningitis, an often-fatal inflammation of the tissues surrounding the brain and spinal cord, occurred at Princeton University. A similar outbreak occurred at the University of California, Santa Barbara.17 The fatality rate for meningitis is about 10 percent, and some 4,000 new cases are diagnosed each year.18 The campus outbreaks affected 13 people, causing one death and another student to lose his feet to amputation.

A vaccine was available in Canada, Europe, and Australia—but not in the United States. It took until December for the FDA to give emergency approval to use the vaccine on these two college campuses.19 And it was January 2015 before the FDA approved general use of the vaccine.20

Similarly, effective sunscreen ingredients are more widely available abroad than in the United States. The United States has 16 permitted ingredients, the EU has more than two dozen, and Japan has more than 40.21 Sunscreens are widely recognized, and recommended by several government agencies, as an effective method to prevent skin cancer, a disease that afflicts 5 million Americans each year.22 When Congress grew frustrated with the slow pace of FDA review of additional ingredients, it commanded the agency to make a decision by February 2015. The FDA did so—by rejecting all eight pending applications, asking for more data. To date, no manufacturer has found it worth the enormous costs of yet another study to demonstrate the safety and efficacy of ingredients that other countries have already approved.23

Or consider aspirin, a homely, familiar, and time-tested product included in millions of American medicine cabinets. Since 1985, the FDA has recognized that a daily aspirin regimen is an effective way to prevent a second heart attack.24 Since 2002, the American Heart Association and the U.S. Preventative Services Task Force have recommended the same regimen to prevent a first heart attack.25 Although the body of clinical evidence is persuasive to these expert organizations, they are not sufficient for the FDA. In 2014, it rejected an application for claims that aspirin can prevent a first heart attack, and it still refuses to permit such claims.26 Because aspirin is widely available, many Americans can, and do, take a daily dose of aspirin, either on their own or following their doctor’s advice. Nonetheless, the FDA continues to insist on the need for costly additional studies to prove even more conclusively what we already know.27

B. Sugar price supports: not so sweet

Some regulatory actions serve to artificially increase prices, particularly those of agricultural products. These are often defended as necessary to protect family farms and rural communities, especially from factors beyond farmers’ control—like weather conditions—that can cause prices (and therefore revenues) to fluctuate widely.

One of the clearest examples of this regulatory activity is the U.S. sugar price support program, which uses three methods of artificially increasing prices for domestic sugar: guaranteed prices, domestic allotments, and import quotas. This program has been successful at keeping sugar prices high. Between 1982 and 2016, domestic U.S. prices averaged nearly double the world price: 29.28 cents vs 15.2 cents per pound.28 The total cost of the program to sugar consumers is an estimated $2.4 billion annually, with approximately $1.4 billion going to sugar growers.29 Like many price support programs, it continues to exist because of its relatively small cost to the typical sugar-using consumer (about $10 per year) and, therefore, is not worth most people’s attention. For sugar farms, however, the average benefit of roughly $310,000 per year is worth significant lobbying expenditures to maintain the rules.30

Although the $1.4 billion represents a loss for consumers and gain for producers, the $1 billion difference in the total cost of the program is due to a reduction in U.S. economic output due to inefficient use of resources, such as shifting candy production overseas where sugar is cheaper. Without the program, overall economic activity in the country would be $1 billion greater. The higher price reduces the ability of more sugar to be sold and consumed, reducing the number of jobs, investment, and other activity that would benefit more Americans.31

C. Out-of-date regulations reduce risk for no one

Once regulations are on the books, they are rarely evaluated to determine whether they are still needed or working as intended.32 This can be a particular problem when regulations don’t keep up with evolving technologies and business practices, as this next example illustrates.

Since at least the mid-19th century, people have attempted to find safe ways of transmitting money across long distances, eventually resulting in what became commonly known as “money orders.” There was a persistent problem, however, that the companies that agreed to take and transmit cash would simply take a customer’s money or might, through negligence, lose it by theft or other means. In order to protect money order customers, states began to pass laws requiring the licensing of companies that transmitted money.33 These licenses were intended to assure the public that these companies could be trusted with holding their money.34

Technology, however, has advanced and, today, it is no longer necessary for a company that transmits funds to actually obtain them from a customer. For instance, cryptocurrency, like Bitcoin, allows a service provider to offer money transmission services without taking custody of a customer’s funds.35 While a consumer will see a website interface that looks a lot like a bank portal, their money is not in an account held by a third party, but instead is held on their own computer under their personal control.

However, state laws continue to regulate entities that transmit money, despite the fact these entities, today, may never actually pose a risk to consumers of taking or losing the customer’s funds. Thus, today, customers face the prospect of being required to pay a licensed company to transmit money that the company will never actually have in its possession.

D. Intoxicating renewable fuels

In an effort to promote an alternative to fossil fuels, Congress authorized the Environmental Protection Agency (EPA) to establish a Renewable Fuels Standard (RFS).36 This regulatory program forces consumers to burn ethanol by requiring a minimum amount of ethanol be added to conventional gasoline.37 The program originally anticipated that new methods of producing “advanced biofuels” would be developed that were cost-effective and environmentally beneficial. That turned out to be a false promise; most of the ethanol is still produced by conventional methods from corn.38 By artificially increasing the demand for corn, the regulations have put more land under intensive cultivation, which promotes the use of more fertilizer. This, in turn, aggravates water pollution, including the creation of so-called “dead zones” in the Gulf of Mexico.39 Perhaps worse for consumers, the RFS requirements raise prices for food (such as corn-fed beef, and crops that compete with corn for acreage) as well as for fuel. The use of ethanol fuels can aggravate ozone and other conventional pollutants, and does not appear to reduce emissions of greenhouse gases.40 Sold on the basis of helping the environment, the RFS, ironically, seems to have the opposite effect.

So why is the government forcing consumers to pay billions of dollars41 for a program that damages the environment? Because corn producers and ethanol refiners greatly profit from these regulations. They will spend significant resources to ensure that the program survives and that the EPA uses its discretion to maximize their profits. Some EPA personnel might wish to put a stop to it, but no nominee to a position of responsibility at the EPA will be able to get confirmed without giving assurances to farm-state Senators that the program will not be curtailed.42 Further, it is difficult for any presidential candidate to survive the Iowa caucuses without pledging to support the Renewable Fuels Standard.

More recently, a new constituency has found a way to profit from the RFS standard. Refiners are required either to include a certain percentage of ethanol in the gasoline that they sell, or else to buy “RIN” credits from a seller who is able to use more ethanol than required. But small refiners have argued that they cannot afford to do either, and they have been able to obtain exemptions from the EPA.43 They then are able to profit by being exempt from an expensive rule to which their larger competitors are subject. On top of that, the EPA discovered that when small refiners were granted an exemption, they would “short the market” in RINs, since they had advance knowledge that the RIN price would decline when the rest of the world heard about the exemption.44 So now the farmers and the small refiners are engaged in a contest to tilt the RFS program to profit themselves; meanwhile consumers are stuck with the costs.

E. Air permit gridlock

In 1970, Congress enacted the Clean Air Act to “promote the public health and welfare and the productive capacity of [the Nation’s] population.”45 Since its adoption, the United States has made great strides in improving air quality, reducing emissions of the six common pollutants that EPA has targeted – particulate matter, ozone, lead, carbon monoxide, nitrogen dioxide and sulfur dioxide – by about 75 percent while the U.S. gross domestic product has grown 275 percent.46

In 1977, Congress amended the Clean Air Act and, among other things, added EPA’s New Source Review (NSR) air permit program to ensure that modern pollution controls are designed into new major facilities; it also required that existing facilities undertaking significant modifications update their pollution control systems to current standards.47 Unfortunately, over time, EPA expanded the complexity of the NSR program so that it became, perversely, a significant impediment to the modernization of existing factories and power plants – preventing, rather than encouraging, the development of more efficient, cleaner facilities.48 Indeed, in the view of many experts, EPA’s NSR permit program, as it applies to existing sources, is the most unsuccessful and counterproductive of all the Clean Air Act programs.49

Although the NSR program is the primary regulatory tool for controlling emissions from new plants, it simply was not intended to be a key program for controlling emission from existing facilities.50 If anything, the EPA’s approach to the NSR program too often delays or thwarts efficiency and air quality improvements at existing facilities. That is because the NSR requirements that EPA established for modified facilities are so stringent, costly, and slow that they discourage companies from upgrading their plants.51 The NSR program is so complex that the basic issue of whether a company has made a “major modification” that will trigger NSR is discussed in several EPA regulations, over one thousand pages of guidance documents and Federal Register notices, and dozens of court cases.52 In the end, the very things we should want companies to do – such as making their plants more efficient, reliable, safe, competitive, and clean – are thwarted.

In many cases, the modernization of existing plants, already subject to myriad other controls, is discouraged and beneficial projects using best controls are blocked simply because of unrealistic air quality modeling and assumptions that unnecessarily trigger the NSR process.53 This problem has become more acute with EPA’s substantial tightening of its National Ambient Air Quality Standards (NAAQS), which in some areas now are close to background levels (i.e., levels of pollution from natural sources and transport of anthropogenic emissions from other areas, including from outside the U.S.). This leaves little or no “headroom” for states to permit new efficiency projects that can reduce emissions per unit of output — even after the installation of the best available pollution control technology.54 The problem has been seriously exacerbated by EPA policies and modeling tools that significantly over-predict impacts from facilities, especially when a series of unrealistic assumptions are compounded. Thus, it is imperative that modelling results reflect the reality of local air quality and actual exposure to emissions.

Recent initiatives aimed at reducing air permit gridlock may reduce some of these barriers to environmentally-sound modernization. These include efforts to expedite permit reviews and reduce regulatory burdens,55 to make implementation of the NAAQS program more efficient and cost-effective,56 to allow emissions increases and decreases to be “netted” (which expedites projects that won’t have significant emissions impacts57) to modernize emissions monitoring to anticipate ever-evolving technologies and better reflect actual public exposure,58 and to better align a project’s review to its significance, allowing unrelated investments at facilities to proceed more quickly.59

Reducing unnecessary delays, costs and other impediments to projects that will modernize manufacturing and power plants can benefit the environment as well as jobs, economic growth, and U.S. global competitiveness.

F. Small businesses are particularly hurt by unreasonable regulation

Just as regulations like those previously mentioned can stifle innovation and growth – or worse, cause societal harm—regulations often pick winners and losers. And when it comes to regulations, small businesses bear a disproportionate amount of the regulatory burden.60 Compliance costs, difficulty understanding regulatory requirements, and extra paperwork are the key drivers of the regulatory burdens on small business.61 Understanding how to comply with regulations is a bigger problem for those firms with one to nine employees, since 72 percent of small business owners in that cohort try to figure out how to comply themselves, as opposed to assigning that responsibility to someone else.62

The uncertainty surrounding what regulations may be imposed next effectively acts as a “boot on the neck” of small business—negatively affecting a small business owner’s ability to plan for future growth, including hiring new workers. Until recently, “government regulations and red tape” were listed as among the top three problems for small business owners, according to the National Federation of Independent Business (NFIB) monthly Small Business Economic Trends survey.63 The NFIB’s Small Business Problems and Priorities report ranked “regulations” second only behind taxes as the most pressing problem.64 More recently, small business optimism has reached record levels in large part due to a more light-handed regulatory approach.65

For small companies, federal regulation can be the difference between success and failure. The more complicated the regulatory regime, the less likely it is a small business will be able to absorb the regulatory burden and survive. For example, following the enactment of the Dodd-Frank Act, which was meant to prevent banks from becoming “too big to fail,” the impact of regulations implementing that law has led to a dramatic reduction in community banks.66