Could a proposal intended to address “regulations that disproportionately burden low-income households,” have an impact on securities rules and regulations promulgated by the SEC? On July 24, the House Budget Committee (Chair Paul Ryan) released a Discussion Draft for legislation called “Expanding Opportunity in America.” While most of document relates to a Republican approach to poverty concerns, one section addresses regulatory reform, more specifically, proposed efforts to prevent “regressive regulation,” which can have the effect of redistributing wealth from low- to high-income families. Although the initial focus of the proposal appears to be on the barriers to opportunity created by excessive occupational licensing requirements (e.g., “state licensing laws require ‘more classroom time . . . to become a cosmetologist than to become a lawyer’ in Minnesota”), if adopted, could these regulations also preclude some attempts at securities regulation?
The Discussion Draft observes that, while households vary in size, income and location, the “regressive effects of federal regulations are especially concerning…. But regulatory costs are baked into every good and service, and lower-income households have to contribute a larger share of their income to pay for cost increases resulting from these regulations….As a result, regulations come with a hidden but very real cost that can greatly exceed the benefits to low-income families. These expensive regulations eat up households’ disposable income and thereby crowd out their ability to mitigate risks that are far more imminent for them,” such as healthy food, healthcare and safety. As an illustration, the Draft highlights regulation of the production and use of energy, which disproportionately burden “low-income families because energy costs make up a disproportionately large share of their budget.”
The proposal would require regulators to assess whether new regulations disproportionately affect low-income families. More specifically, an agency proposing a new regulation would have to conduct a three-part distributive analysis, focused on “low-income households” or “low-income jobs”:
- who would bear the cost of the proposed regulation and whether those costs would be regressive, taking into account “the willingness to pay among lower-income households”;
- who would benefit from the proposed regulation; and
- jobs lost, both directly and indirectly, and jobs created (not just the net figure) above and below the median income in the regions affected, including identification of the industries that would be affected.
The analyses would be reviewed by the OMB. If the proposed regulation was “determined to have regressive effects, either through imposing a disproportionate burden on low-income households or by displacing a disproportionate number of low-income workers, the relevant agency would need to determine if there were an immediate risk to public health or safety (and make the necessary showing). If there were, the rule could proceed. If there were not, the agency would need to seek Congress’s approval before the rule could be finalized.” The Discussion Draft states that this requirement for Congressional review is intended to provide a “much needed check on a seemingly overzealous bureaucracy.” There would also be a “private right of action against any agency that failed to comply with this provision. If an agency violated this requirement, it would be barred from implementing that regulation until the analysis was completed, with exceptions made for rules that addressed an immediate risk to public health or safety.”
As observed in this Bloomberg article by Cass Sunstein, former administrator of the White House Office of Information and Regulatory Affairs during the Obama administration and current professor at Harvard Law School, there are several problems with the proposal. While complimentary of the helpful direction of the proposal – particularly its willingness to “take account of the so-called distributional effects of regulations” – Sunstein takes issue with the proposal’s focus on distributional burdens without taking into account distributional benefits. Assume, he argues, that an environmental regulation would raise energy prices (which could disproportionately burden low-income individuals) or cost some low-income jobs. Under the proposal, the regulation would be considered regressive. However, Sunstein argues, “it would eventually save thousands of lives every year. The benefits would dwarf the costs. Regressive effects are not desirable, but they should not be a trump card.” Under the proposal, the only way to salvage the regulation would be to demonstrate an immediate risk to public health and safety or to obtain the approval of Congress, which is ”frequently paralyzed.”
Without balancing benefits and burdens, as Sunstein proposed above, it’s conceivable that regulations involving any substantial cost, including securities rules and regulations, could result in low-income job losses or increased product prices, at least in the nearer term. And even if potential benefits were taken into account, it’s not clear that low-income households (which may not participate directly in the securities markets) would be considered to share in, or willing to pay for, the benefits of the rule-making. But it is the proposed remedy — Congressional approval — that is most startling. The effect of the proposed remedy is to give Congress a regulatory veto that could be exercised through simple inaction. (We all know how is easy it is to get Congressional approval of anything more controversial than declaring national “love your puppy” month, and even that ….) As a result, it is possible that, under the proposal, many regulations, including some worthwhile rules, could fail altogether, mired in Congressional dithering or worse. Valid concerns regarding occupational licensing aside, a cynical person might wonder if the proposal – even assuming that it is a sincere attempt to help low-income households, a valid and worthwhile goal – could be abused by those whose primary goal is simply to curb that “overzealous bureaucracy.” And one person’s overzealous bureaucracy may well be another’s safeguard against fraud or environmental degradation.