Amid  all of the controversy surrounding President Trump’s Executive Order suspending immigration from seven countries, and his nomination of Judge Neil Gorsuch to the Supreme Court, another executive order that may be at least as significant in the long run to reining in the administrative state has not received much attention.  The Executive Order on “Reducing Regulation and Controlling Regulatory Costs,” issued on January 30 without much fanfare, did three things: (1) required every agency promulgating any new regulation to get rid of two existing regulations; (2) required that the projected cost to the economy of the regulations being eliminated must be at least as great as the costs of the new one, as computed under standard Office of Management and Budget (OMB) guidelines, and (3) authorized OMB to impose a regulatory budget on each agency.

The first point, sometimes called “one in, two out,” has garnered some media attention, but in the long run, the other two provisions limiting regulatory costs may be at least as significant, particularly for the Environmental Protection Agency, which has historically imposed about half the costs of federal government regulation on the economy.  But this Executive Order also takes us into new territory and raises a host of legal questions.

The idea of a “regulatory budget” to constrain the costs government imposes on the economy  has been discussed since the 1970’s.  The basic idea is to adopt Madison’s constitutional concept of “balancing ambition with ambition” to regulate the regulators.  However, in the past, establishing a regulatory budget has generally been thought to require legislation.  Although proposed on numerous occasions, statutory authority to impose regulatory budgets has never been enacted.  It remains to be seen whether the courts will allow a binding regulatory budget to be imposed on agencies by the White House acting alone.

The Administrative Procedure Act specifically creates a cause of action to “compel agency action unlawfully withheld” as well as a right to petition for new rules.  How will the courts react when agencies begin to turn down petitions for new rules because there is no room for them in the agency’s regulatory budget, or because the agency judges them to be less important than existing rules that would have to be eliminated to pay for the new regulations?

In Motor Vehicle Manufacturers Ass’n. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983), the Supreme Court rejected an attempt by the Reagan Administration unilaterally to rescind an existing rule requiring automatic seat belts.  That precedent appears to require not only notice and comment but also a rational basis in the record that will survive judicial review in order to eliminate a legislative rule previously promulgated through notice and comment procedures.  What weight will the courts give to agency proposals to eliminate existing rules because they are required to do so in order to promulgate new ones under the Trump Executive Order?  And what about emergency rules or rules required by statute?  Do those also require elimination of two existing regulations?

Even assuming that the courts do uphold President Trump’s authority to impose the requirements discussed above on agencies and departments “in” the Executive Branch, what about the “independent” agencies, such as the Federal Energy Regulatory Commission (FERC), the Consumer Product Safety Commission (CPSC) or the Federal Trade Commission (FTC)?   These agencies often consist of multi-member commissions, sometimes with staggered terms and members of different political parties and a statutory prohibition on firing except for good cause.  On its face, the Executive Order does not exempt them, but the President’s power to direct them is unclear.  In Humphrey’s Executor v. United States, 295 U.S. 602 (1935), the Supreme Court held that President Roosevelt could not fire the Chairman of the FTC for policy differences.  More recently, the Obama Administration issued an Executive Order stating that independent agencies “should” comply with prior executive directives regarding public participation, scientific integrity in the rule making process, and retrospective analyses.  A number of independent agencies followed President Obama’s Order, but have been careful to characterize it as “ask[ing]” or “request[ing],” not mandating, agency action.

There are also a host of implementation questions that will presumably have to be answered by the OMB guidance implementing the recent Executive Order.  Many regulations, particularly in the environmental area, require large initial capital costs, but much lower costs for on-going operation and maintenance expenses; for example, when installing new pollution control equipment.  In assessing whether the costs of the eliminated regulations balances the costs of the new regulations, may the agency take into account the historic costs that have already been incurred (what economists call “sunk costs”), or only the current on-going costs that would be eliminated if those regulations were rescinded (what economists call “avoided costs”)?

More broadly, this Executive Order, as well as prior executive actions relating to the Keystone and Dakota Access Pipelines and Infrastructure Permitting, provides insight into the strategy that the Trump Administration appears to intend to use to control the so-called “Administrative State.”  For years, Presidents have struggled to impose policy direction and control on the actions of agency bureaucrats whom they generally cannot fire due to civil service protections. Past approaches have included the creation of the Senior Executive Service who are subject to dismissal, the OIRA review process for new rules, and the White House “czars” created by the Obama Administration.  It is becoming increasingly clear that the Trump Administration intends to try to manage the agencies by Executive Order, a strategy that some legal scholars have questioned as constitutionally dubious if the President directs particular actions as opposed to establishing general principles.