With respect to the past and future of regulation, there are two truly indispensable ideas. Unfortunately, they are in serious tension with one another. The solution lies in a third idea, which involves democracy itself—but perhaps not quite in the way that most people think.

The first idea is that it is immensely important to measure, both in advance and on a continuing basis, the effects of regulation on social welfare. As an empirical matter, what are the human consequences of regulatory requirements? That is the right question to ask, but inside and outside of government, it’s tempting to focus on other things. These include the opinions of relevant officials and interests (“What does the business community think?”), or purely symbolic or expressive considerations, as in the unhelpful and potentially damaging view that more stringent environmental regulation, or an increase in the minimum wage, is desirable simply because “it makes a statement.”

At the present time, the right way to answer the right question is to try to identify the costs and benefits of regulations, in order to catalog and compare the various consequences, and to help make sensible trade-offs. To be sure, cost-benefit analysis can create serious challenges, and it is hardly perfect. Nonetheless, if we want to know about the real-world effects of regulation, it is the best tool we have.

The second idea, attributable above all to Friedrich Hayek, is that knowledge is widely dispersed in society. As Hayek and his followers emphasize, government planners cannot possibly know everything that individuals know, simply because they lack that dispersed knowledge. The multiple failures of plans, and the pervasiveness of unintended consequences of government activity, can be attributed, in large part, to the absence of relevant information. Hayek was particularly concerned about socialist-style planning. He contended that even if it is well-motivated, socialist planning will fail, because the planners will not know enough to succeed. Hayek celebrated the price system as a “marvel,” not for any mystical reason, but because it can aggregate dispersed information.

Hayek’s concern offers a serious cautionary note for planners of all kinds, including contemporary regulators. Even if they despise socialism and are simply correcting market failures (as in, for example, the domains of pollution, health care, or occupational safety), they might lack indispensable information. Modern followers of Hayek emphasize what they call the “knowledge problem,” understood as the government’s inevitable ignorance, which is a potential challenge for regulators of all kinds, working (for example) to implement the Clean Air Act, the Affordable Care Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act. If cost-benefit analysis is essential to sensible implementation, then incomplete knowledge on the part of government would appear to be a serious problem.

The tension, in short, is that regulators have to focus on costs and benefits (the first indispensable idea), but they will often lack the information that would enable them to make accurate assessments (the second indispensable idea). In light of the knowledge problem, how can they produce reliable cost-benefit analyses, or any other kind of projection of the human consequences of what they seek to do and of potential alternatives? What I am suggesting, in short, is that regulators are in large part technocrats, charged with measuring and assessing consequences, but their technocratic enterprise runs into a formidable objection. Of course the force of the objection will depend on the context but, in some situations, the effort to assess the likely effects of a regulatory intervention will go badly wrong.

A clue, and possibly even a solution, comes from the 1940s. During and after Franklin Delano Roosevelt’s New Deal, the United States saw an intense debate about government regulation. The competing sides were the New Deal enthusiasts, who were receptive to a larger regulatory state, and the New Deal critics, who insisted that the new administrative institutions were a betrayal of constitutional ideals. One of the enduring products of that debate was the Administrative Procedure Act (APA), enacted in 1946. The APA contained a genuine innovation, now called “notice-and-comment rule-making.” The basic idea is that regulators do not merely consult with one another and then issue final rules. Instead, they must provide the public with advance notice of what they are planning to do and why, and they must also solicit comments. It was expected that when agencies finalized rules, they would incorporate what they learned from the public.

Why did Congress call for notice-and-comment rule-making? The historical record does not give a clear answer, but we can isolate two factors. The first involves self-government itself. During the New Deal and since, some observers have expressed concern that regulators are not directly accountable to the people, and have contended that they may suffer from some kind of “democracy deficit.” For such critics, notice-and-comment rule-making is an important way to legitimate the administrative process, by increasing accountability and responsiveness. Democratic participation is built into the very idea of notice-and-comment rule-making. That technical idea is designed to help to ensure ultimate rule by “We the People.”

The second factor is less abstract and high-flown, and it is, I think, even more important. It involves information, not legitimation, and it has roots in Hayek’s concerns. We have seen that if government is attempting to make our air cleaner or our food safer, or to reduce deaths in the workplace or on the highways, or to increase homeland security, it will inevitably have incomplete information about the effects of its plans. Some non-hypothetical examples: If regulators attempt to eliminate emissions of ozone-depleting chemicals, they might end up banning asthma inhalers, and such bans might have adverse effects on human health. If regulators take steps to make the food supply safer, they might impose high costs on farmers, including small farmers, and potentially create serious economic dislocations. If government imposes high costs on electricity producers in the name of environmental protection, it might produce a spike in the cost of electricity, which would be particularly harmful to the poor.

To make sensible decisions, regulators need to obtain a great deal of information about questions of this kind. As hard as they might try, they will not know everything, and they might have significant gaps in their knowledge. Here is the beauty of the notice-and-comment process. If regulators have made mistakes or been too optimistic, there is a good chance that members of the public will tell them about it. Their own assessment of the costs of a proposed rule might depend on unrealistic assumptions. If so, someone will probably object on those grounds. They might not have seen how a well-intended rule would affect small business. Their own scientific projections might not be consistent with the most recent scientific findings. They might have relied on economic assumptions that are not state-of-the-art. They might have neglected local circumstances, failing to see that what makes sense in Los Angeles and New York is unnecessary, or even harmful, in Carson City and Boise.

In the initial decades after enactment of the APA, some people greatly admired the notice-and-comment process, seeing its immense potential for providing valuable information. But the law did not realize its potential. There were two reasons. The first is that many regulatory agencies relied on adjudication, rather than rule-making, to make public policy. Instead of proposing a new regulation, for example, the Federal Trade Commission would initiate a proceeding against someone who engaged in apparently deceptive advertising, and it would produce the equivalent of a new rule as a result of that proceeding. Needless to say, this kind of approach—policy-making by adjudication—was far from ideal, in part because regulators were unlikely to hear from enough people. But since the 1980s, agencies have chosen to rely far more on notice-and-comment rule-making (with the continuing and disappointing exception of the National Labor Relations Board, which relies on adjudication to this day).

The second reason is that from the standpoint of most members of the public, the notice-and-comment process has been fairly arcane, and it is not exactly simple to send comments to regulators, or for regulators to read and assess everything that they receive. Well-organized interest groups, which are specialists in the regulatory problem at issue, have long played a part in sending comments, and sometimes they make exceedingly valuable contributions. But there is a large difference between their self-interested positions and the dispersed knowledge of the public. A lot of the problem can be captured in a single word: paper. As long as everything was received and read in hard copy, there were significant limits to the notice-and-comment process. Among other things, those who sought to file comments could not necessarily see the comments sent by other people. For the process to work as well as it might, that kind of visibility, and a substantive back-and-forth, can be exceedingly important.

But we are finally starting to realize the full potential of the rule-making process. The United States has entered the age of e-rulemaking, thanks in part to Executive Order 13563. Issued by President Obama in 2011, it serves as a kind of mini-Constitution for the regulatory state. As we shall see, that executive order promises to reduce the tension between the two indispensable ideas with which I began, above all by democratizing regulation.

Among other things, Executive Order 13563 requires regulations to be adopted “through a process that involves public participation.” It directs agencies to “afford the public a meaningful opportunity to comment through the Internet on any proposed regulation, with a comment period that should generally be at least 60 days.” Importantly, it requires them to “provide, for both proposed and final rules, timely online access to the rule-making docket on Regulations.gov, including relevant scientific and technical findings, in an open format that can be easily searched and downloaded.”

For proposed rules, that access has to include an “opportunity for public comment on all pertinent parts of the rule-making docket, including relevant scientific and technical findings.” Do not be fooled by the jargon (“rule-making docket”) in that last sentence. It means, in essence, that members of the public are allowed to see technical support for regulations, including the analysis of costs and benefits, and also to see public comments themselves. That form of transparency is exceedingly important.

Regulations.gov may not be everyone’s favorite website, and it isn’t a lot of fun, but it is worth a look, because what appears there has significant consequences for the nation (and sometimes many nations) and because it is transforming notice-and-comment rule-making. When an agency proposes a rule, all the world can find it and see it, usually with great ease. If a proposal has a mistake, or veers in a bad direction, there is a genuine opportunity to comment and to get the problem fixed. When I served as administrator of the White House Office of Information and Regulatory Affairs from 2009 to 2012, I was surprised by one thing above all: A lot of regulators pay exceedingly close attention to public comments, and they spend a great deal of time on Regulations.gov. Such comments are carefully read, typically by people who have the authority to move regulations in better directions. Commenters often fear that what they say will go into a black hole but, in general, the fear is misplaced. People with authority end up reading what they write.

It’s not easy to solve the knowledge problem, but in the modern era, regulators are in a far better position to collect dispersed information from the public. On this view, the goal of notice-and-comment rule-making is emphatically not to conduct an opinion poll, to take some kind of political temperature, to see how much applause a proposal is able to attract, to defuse public opposition, to engage in some communications strategy, or to collect the digital equivalent of postcards (even though a number of those are sometimes sent in). Instead, the goal is overwhelmingly substantive, in a sense even Hayekian—to fill gaps in knowledge and to see what might have been overlooked.
In particular, the agency’s assessment of the likely consequences of regulations is subject to close scrutiny. If the agency has inaccurately assessed costs and benefits, public participation can and often will supply a corrective. Democratization of the regulatory process, through public comment, has an epistemic value. It helps to collect dispersed knowledge and to bring it to bear on official choices.

These points should not be overstated. It is important to acknowledge that even in its ambitious form, the public comment process might not solve the knowledge problem, and there are imaginable risks. Dedicated followers of Hayek would insist that the aggregation of information will inevitably be imperfect and (in their view) probably worse than that. Markets encode the knowledge and values of everyone who purchases relevant products. By contrast, most citizens are unlikely to know about notice-and-comment rule-making, or to have the commitment and background that would enable them to participate. Even in an age of electronic rule-making, it is possible and reasonable to fear that well-organized groups, of one kind or another, will inevitably play the most important part in the process, and perhaps dominate it. If so, we would end up with a kind of epistemic “skew” on the part of regulators. The supposed solution to the knowledge problem may make things even worse.

This risk cannot be dismissed in the abstract. It remains important to rely, to the extent possible, on market-friendly tools, such as disclosure of information and economic incentives; such tools diminish the knowledge problem by increasing reliance on the private sector. But it is also true that public officials are fully able to discount self-serving arguments, and to give critical scrutiny to external arguments and claims (often with the aid of a wide array of public comments). During my period in government, I witnessed this process every day. Within the executive branch, people work exceedingly hard to produce solutions that are sensible, whether or not particular interest groups like them. Insofar as diverse regulators are working together to produce lawful regulations, justified by costs and benefits, members of the public, the media, and academia wildly overstate the role of interest groups and even of political pressures. For regulators, the principal problem is not such pressures; it is a lack of information.

On that count, notice-and-comment rule-making turns out to be crucial. We have seen that there is a serious tension between what I have called two indispensable ideas; that tension accounts for some of the most serious challenges that regulators have faced since the New Deal period. The best way to dissolve the tension is to acquire dispersed information. Notice-and-comment rule-making, an innovation of the 1940s, now, thanks to the Internet, offers an unprecedented opportunity to do exactly that—and in that sense to reduce the knowledge problem through the process of democracy itself.