NARRATOR: Thanks for joining this episode of the No. 86 lecture series, where we discuss Administrative Law, including the history of the administrative state and modern debates about its powers. Today’s episode features Susan Dudley, Director of the George Washington University Regulatory Studies Center and Distinguished Professor of Practice in the Trachtenberg School of Public Policy and Public Administration. As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker. PUBLIUS: Professor, Dudley, where did administrative agencies come from and why do we need them? SUSAN DUDLEY: Our Constitution calls for three branches of government, the legislative, the executive, and the judicial, and there have been concerns over time that the regulatory agencies have kind of cut across all three of those, which branch exactly did they fit in. In the early part of the last century, they were labeled the fourth branch of government which some lawyers thought was distinctly unconstitutional. Others argued that Congress just doesn't have the knowledge or expertise or the capacity to write the detailed kinds of regulations that our increasingly complex society has. The debate on those issues really raged in the early part of the last century, and in 1935 an important Supreme Court decision came down saying that it was unconstitutional for the legislature to grant legislative authority, to delegate to the executive branch agency's legislative authority, that the constitution gave to them. The Schechter Poultry case in 1935 was an important decision, but it was essentially the last time that the Supreme Court has come down firmly against delegation. In 1946, this dispute between those who thought it was unconstitutional for Congress to delegate power, and those who thought it was necessary for agencies to have this delegated authority, was resolved with the passage of the Administrative Procedure Act, essentially saying these administrative agencies are essential, but a) they have to operate within the legislative authority delegated by Congress, and b) they have to follow certain procedures, and so the Administrative Procedure Act, now more than 70 years old, still operates. Those procedures still operate today. PUBLIUS: How many agencies are there? Do we have any way to measure the impact of their regulations? SUSAN DUDLEY: It's hard to say with any precision about how many agencies we have. I would say it's at least 100. It depends on how you count it, and what you call a regulatory agency. But I'd say 100 is a good, rough number. Those agencies issue between three and four thousand regulations every year. We tend to classify regulations depending on how significant they are. Most of those are not terribly significant. But about three or four hundred, sometimes as many as six or seven hundred, are considered significant regulations, meaning they will have a real impact on a significant number of people. And then, within that group that are significant, there's a subset that we consider economically significant, or major. And those are the ones likely to have an impact of $100 million or more, per year. And there are between 50 and, maybe even, 100 of those every year. We can't measure the impact of regulations the way we do the fiscal budget. Every year, the President presents to Congress his proposed budget. And Congress authorizes and appropriates funds within that. And so we have a document that we can track back, and project into the future, that looks at the on-budget spending that the government requires. Those are the things funded through tax dollars and deficits. There's nothing comparable to that, to measure regulations. It's like the Seven Blind Men and the Elephant. And each of them looks at the elephant from a different perspective. And one touches the tail and thinks it's a rope. And the other one touches the tusk and says it's a spear. What we try to do with regulations is, we look at it from enough different perspectives that we can get a sense of the whole. So I'll just give you a few of the ways that we measure regulation. One is the number of regulations a year. Another is pages in the Federal Register. The Federal Register is where every new regulation has to be published, both as a proposal and then when it's final. So that is a measure of the flow. I couldn't tell you right now how many pages there are. But I once read through a page, and it took me about four minutes a page. And I then calculated that times the number of pages, and found that it would take ... you would have to hire two full-time people if you were a business that really wanted to know everything that was in the Federal Register, and to read those pages every year, to read it, it'll take a lot more time probably to comprehend it. Another measure that we use is the code of federal regulations and that measures the stock. Once a regulation is final, it's added to the code and that is what you as a small businessperson, or a worker have to comply with. Another measure dissects the federal budget and looks at the on budget costs of running the agency. That doesn't tell us about the compliance costs, or the public impact, it just measures the number of employees and the outlays to write, and administer, and enforce the regulations. That's another measure that we can see, but all of these measures, the scope of regulation has been growing quite dramatically, especially since about the 1970s. PUBLIUS: Historically, what are the types of things that agencies regulate and why? SUSAN DUDLEY: Okay. The form of regulation that was predominant in the early part of the 20th century was what we consider economic regulations. Agencies were concerned that railroads had market power and therefore that they needed to regulate the rates that railroads could charge their customers. This was the predominant form of regulation. The Interstate Commerce Commission, which was the oldest agency, and then the Civil Aeronautics Board when airlines were young. The theory of regulation was that these agencies will be unaffected by politics and they will regulate in the public interest, and they will set prices to protect consumers. But observers started to realize that in fact they seem to be keeping prices high and protecting their producers, rather than the consumers. That led to a realization that perhaps regulatory agencies could be captured by dominant producer interests. We started to see a decline in that type of regulatory activity in beginning with ... Well, President Carter really started to work to deregulate trucking and air. He was building on actions of President Ford before him and then President Reagan, when he took office in 1981, he also continued that deregulation. We actually had a period of significant deregulation of that traditional form of economic regulation. Interestingly though, during that same period we saw a dramatic increase in a new type of regulation, which we broadly categorize as social regulation. Regulation of environment, health, safety, workplace. The increase in those regulatory agencies was dramatic in the 70s and 80s. It was very interesting at the time that we were seeing a reduction in one type of regulation, we were seeing a dramatic increase in another. It is that latter form of regulatory agency that continues to grow today. PUBLIUS: We frequently think of regulation as making things more expensive and more difficult. Are there good reasons for at least some regulation? SUSAN DUDLEY: One question often we think about is why do we need regulation at all in a country where we believe in competitive markets? We believe that the forces of competition, people willingly trading with each other are the best way, not only to allocate goods and services to where they're most valued but also to encourage innovation and new things. The argument for regulation is that, yes, markets work very efficiently, but there are certain conditions that are required, and one is that clearly defined property rights so that you have the ability to buy and sell something. Another is that there's numerous buyers and sellers so that there's competition in the market. The rationale for economic regulation was a failure in that part of the market that there weren't numerous buyers and sellers and the natural monopoly argument. The rationale for regulations is that when there are these failures of market conditions, when they don't work in that idealized way, that's when we might need to intervene. So the rationale for environment, safety and health regulation tended to be that there were failures in private market activity, and one important one is that there are some factors that are external, that are not taken into account by the buyers and sellers, and so economists will talk about externalities and that justifies a lot of environmental regulation that, for example, an unregulated company that is producing a product that also produces a byproduct, a waste byproduct, might just dump that directly into the stream. He's able to sell his product to consumers for a price that only reflects the cost that he's borne, which doesn't include this waste that goes into the stream. But downstream users of that stream, say a fisher person downstream, will have lower quality water, and they will be bearing those costs. In that sense it's external to the buyer and seller of the factory product and it's borne by someone else. The notion for environmental regulation is that there is that externality. Now, what economists would say is we should find ways to internalize that external cost. So, charge the manufacturer, the upstream manufacturer, a fee for the effluent that they put in the stream, and that that fee would then internalize those costs that would make his costs go up, how much he charges the customer for the product would go up, and everybody would then behave properly so that the amount would be optimal. It would reduce the amount that he put in the stream. In fact, environmental regulation is rarely based on internalizing that externality. It tends more to be what we call command and control regulation where that upstream factory would be told that you have to first put your waste water through this treatment process before it can be emitted into the stream. Another argument for the social regulations is that people don't have the information. If you're a buyer and you don't really know how that product was produced, you don't know what's in it, you may not have the information in order to pay the right price. So, you can imagine when my grandmother was young, her whole life she lived on a farm that was somewhat remote in Maine and she would buy her products from people who would come door to door. You may have heard the phrase, "A snake oil salesman." The idea there was someone who would come to your door and say, "This snake oil will make you look younger. It will clean your dishes more sparkling than you've ever had them cleaned before, and it will make your children brilliant." She had no way of checking. I don't think she ever succumbed to a snake oil salesman, but she had no way of evaluating those claims, so that market failure is called asymmetric information. She didn't have the information that the snake oil salesman had about the real quality of his product. So that justifies regulations, I think, often of workplace environments, that the workers didn't know what the employers might know about their workplace safety. It justifies a lot of consumer product regulation and regulation of food, drugs, et cetera. NARRATOR: Thank you for listening to this episode of the No. 86 Lecture series. The spirit of debate of our Founding Fathers animates all of the No. 86 content, encouraging discussion and critical reflection relative to how each subject is widely understood and taught in law schools and among law students. Subscribe to the No. 86 Lecture series on your favorite podcast platform to have each episode delivered the moment it’s released. You can also go to fedsoc.org/no86 for lectures and videos on Federalism, Separation of Powers, the Judiciary and more. Thanks for listening. See you in class! TRANSCRIPT - VERBATIM FOR YOUTUBE Thanks for joining this episode of the No. 86 lecture series, where we discuss Administrative Law, including the history of the administrative state and modern debates about its powers. Today’s episode features Susan Dudley, Director of the George Washington University Regulatory Studies Center and Distinguished Professor of Practice in the Trachtenberg School of Public Policy and Public Administration. As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker. Professor, Dudley, where did administrative agencies come from and why do we need them? Our Constitution calls for three branches of government, the legislative, the executive, and the judicial, and there have been concerns over time that the regulatory agencies have kind of cut across all three of those, which branch exactly did they fit in. In the early part of the last century, they were labeled the fourth branch of government which some lawyers thought was distinctly unconstitutional. Others argued that Congress just doesn't have the knowledge or expertise or the capacity to write the detailed kinds of regulations that our increasingly complex society has. The debate on those issues really raged in the early part of the last century, and in 1935 an important Supreme Court decision came down saying that it was unconstitutional for the legislature to grant legislative authority, to delegate to the executive branch agency's legislative authority, that the constitution gave to them. The Schechter Poultry case in 1935 was an important decision, but it was essentially the last time that the Supreme Court has come down firmly against delegation. In 1946, this dispute between those who thought it was unconstitutional for Congress to delegate power, and those who thought it was necessary for agencies to have this delegated authority, was resolved with the passage of the Administrative Procedure Act, essentially saying these administrative agencies are essential, but a) they have to operate within the legislative authority delegated by Congress, and b) they have to follow certain procedures, and so the Administrative Procedure Act, now more than 70 years old, still operates. Those procedures still operate today. How many agencies are there? Do we have any way to measure the impact of their regulations? It's hard to say with any precision about how many agencies we have. I would say it's at least 100. It depends on how you count it, and what you call a regulatory agency. But I'd say 100 is a good, rough number. Those agencies issue between three and four thousand regulations every year. We tend to classify regulations depending on how significant they are. Most of those are not terribly significant. But about three or four hundred, sometimes as many as six or seven hundred, are considered significant regulations, meaning they will have a real impact on a significant number of people. And then, within that group that are significant, there's a subset that we consider economically significant, or major. And those are the ones likely to have an impact of $100 million or more, per year. And there are between 50 and, maybe even, 100 of those every year. We can't measure the impact of regulations the way we do the fiscal budget. Every year, the President presents to Congress his proposed budget. And Congress authorizes and appropriates funds within that. And so we have a document that we can track back, and project into the future, that looks at the on-budget spending that the government requires. Those are the things funded through tax dollars and deficits. There's nothing comparable to that, to measure regulations. It's like the Seven Blind Men and the Elephant. And each of them looks at the elephant from a different perspective. And one touches the tail and thinks it's a rope. And the other one touches the tusk and says it's a spear. What we try to do with regulations is, we look at it from enough different perspectives that we can get a sense of the whole. So I'll just give you a few of the ways that we measure regulation. One is the number of regulations a year. Another is pages in the Federal Register. The Federal Register is where every new regulation has to be published, both as a proposal and then when it's final. So that is a measure of the flow. I couldn't tell you right now how many pages there are. But I once read through a page, and it took me about four minutes a page. And I then calculated that times the number of pages, and found that it would take ... you would have to hire two full-time people if you were a business that really wanted to know everything that was in the Federal Register, and to read those pages every year, to read it, it'll take a lot more time probably to comprehend it. Another measure that we use is the code of federal regulations and that measures the stock. Once a regulation is final, it's added to the code and that is what you as a small businessperson, or a worker have to comply with. Another measure dissects the federal budget and looks at the on budget costs of running the agency. That doesn't tell us about the compliance costs, or the public impact, it just measures the number of employees and the outlays to write, and administer, and enforce the regulations. That's another measure that we can see, but all of these measures, the scope of regulation has been growing quite dramatically, especially since about the 1970s. Historically, what are the types of things that agencies regulate and why? Okay. The form of regulation that was predominant in the early part of the 20th century was what we consider economic regulations. Agencies were concerned that railroads had market power and therefore that they needed to regulate the rates that railroads could charge their customers. This was the predominant form of regulation. The Interstate Commerce Commission, which was the oldest agency, and then the Civil Aeronautics Board when airlines were young. The theory of regulation was that these agencies will be unaffected by politics and they will regulate in the public interest, and they will set prices to protect consumers. But observers started to realize that in fact they seem to be keeping prices high and protecting their producers, rather than the consumers. That led to a realization that perhaps regulatory agencies could be captured by dominant producer interests. We started to see a decline in that type of regulatory activity in beginning with ... Well, President Carter really started to work to deregulate trucking and air. He was building on actions of President Ford before him and then President Reagan, when he took office in 1981, he also continued that deregulation. We actually had a period of significant deregulation of that traditional form of economic regulation. Interestingly though, during that same period we saw a dramatic increase in a new type of regulation, which we broadly categorize as social regulation. Regulation of environment, health, safety, workplace. The increase in those regulatory agencies was dramatic in the 70s and 80s. It was very interesting at the time that we were seeing a reduction in one type of regulation, we were seeing a dramatic increase in another. It is that latter form of regulatory agency that continues to grow today. We frequently think of regulation as making things more expensive and more difficult. Are there good reasons for at least some regulation? One question often we think about is why do we need regulation at all in a country where we believe in competitive markets? We believe that the forces of competition, people willingly trading with each other are the best way, not only to allocate goods and services to where they're most valued but also to encourage innovation and new things. The argument for regulation is that, yes, markets work very efficiently, but there are certain conditions that are required, and one is that clearly defined property rights so that you have the ability to buy and sell something. Another is that there's numerous buyers and sellers so that there's competition in the market. The rationale for economic regulation was a failure in that part of the market that there weren't numerous buyers and sellers and the natural monopoly argument. The rationale for regulations is that when there are these failures of market conditions, when they don't work in that idealized way, that's when we might need to intervene. So the rationale for environment, safety and health regulation tended to be that there were failures in private market activity, and one important one is that there are some factors that are external, that are not taken into account by the buyers and sellers, and so economists will talk about externalities and that justifies a lot of environmental regulation that, for example, an unregulated company that is producing a product that also produces a byproduct, a waste byproduct, might just dump that directly into the stream. He's able to sell his product to consumers for a price that only reflects the cost that he's borne, which doesn't include this waste that goes into the stream. But downstream users of that stream, say a fisher person downstream, will have lower quality water, and they will be bearing those costs. In that sense it's external to the buyer and seller of the factory product and it's borne by someone else. The notion for environmental regulation is that there is that externality. Now, what economists would say is we should find ways to internalize that external cost. So, charge the manufacturer, the upstream manufacturer, a fee for the effluent that they put in the stream, and that that fee would then internalize those costs that would make his costs go up, how much he charges the customer for the product would go up, and everybody would then behave properly so that the amount would be optimal. It would reduce the amount that he put in the stream. In fact, environmental regulation is rarely based on internalizing that externality. It tends more to be what we call command and control regulation where that upstream factory would be told that you have to first put your waste water through this treatment process before it can be emitted into the stream. Another argument for the social regulations is that people don't have the information. If you're a buyer and you don't really know how that product was produced, you don't know what's in it, you may not have the information in order to pay the right price. So, you can imagine when my grandmother was young, her whole life she lived on a farm that was somewhat remote in Maine and she would buy her products from people who would come door to door. You may have heard the phrase, "A snake oil salesman." The idea there was someone who would come to your door and say, "This snake oil will make you look younger. It will clean your dishes more sparkling than you've ever had them cleaned before, and it will make your children brilliant." She had no way of checking. I don't think she ever succumbed to a snake oil salesman, but she had no way of evaluating those claims, so that market failure is called asymmetric information. She didn't have the information that the snake oil salesman had about the real quality of his product. So that justifies regulations, I think, often of workplace environments, that the workers didn't know what the employers might know about their workplace safety. It justifies a lot of consumer product regulation and regulation of food, drugs, et cetera. Thank you for listening to this episode of the No. 86 Lecture series. The spirit of debate of our Founding Fathers animates all of the No. 86 content, encouraging discussion and critical reflection relative to how each subject is widely understood and taught in law schools and among law students. Subscribe to the No. 86 Lecture series on your favorite podcast platform to have each episode delivered the moment it’s released. You can also go to fedsoc.org/no86 for lectures and videos on Federalism, Separation of Powers, the Judiciary and more. Thanks for listening. See you in class!