How will Cass Sunstein tackle the financial crisis?

“Is OSHA Unconstitutional?” That’s the provocative question Cass Sunstein asked in an article he wrote in 2008 for the Virginia Law Review. His conclusion: No. But the paper, along with more than 20 books and hundreds of other journal articles, comprise a prolific scholarly career that Sunstein has spent questioning norms and sparking debate over legal and regulatory issues.

On April 20, President Obama officially nominated Sunstein to head the Office of Information and Regulatory Affairs (OIRA), a position better known as the “Regulatory Czar” for its all-encompassing governance of the federal regulatory rulemaking process. A semi-obscure agency functioning out of the Office of Management and Budget (OMB), OIRA is primarily charged with analyzing proposed regulation and ensuring compliance with Executive Order 12866, which outlines federal policy for efficient and effective regulation.

Sunstein sailed through his May 12 confirmation hearing, where he chit-chatted with Sens. Joe Lieberman and Daniel Akaka in between questions about his background and philosophy toward regulation. For more than 25 years, Sunstein taught at the University of Chicago Law School before assuming a position with Harvard Law School in 2008.

Lieberman acknowledged Sunstein’s sometimes controversial writings, but endorsed him nonetheless as “someone with exceptional qualifications and extraordinary talent, capable of leading OIRA in a positive direction.” The Senate’s Homeland Security and Governmental Affairs Committee approved Sunstein’s nomination May 20. At press time, the full Senate has not voted on his appointment.

Despite a warm reception in the Beltway, those within the legal community wait anxiously to see how Sunstein-the-Academic will translate into Sunstein-the-Regulator.

Bucking Convention

Prognosticators have found Sunstein somewhat difficult to characterize as a regulator because he doesn’t slip easily into partisan stereotypes. Though most often labeled a moderate, his writings have called for a ban on recreational hunting on one end and the staunch support of cost-benefit analysis on the other.

“The fact that he’s not a stereotype is definitely a good thing, both for public health and the environment and for businesses,” says Michael Livermore, executive director of the Institute for Policy Integrity at New York University’s School of Law. “If you fit him in the stereotype, he’s either going to be bad for business or bad for the environment, and that’s not a choice we want to have to make. He’s going to be looking to make sure we achieve our environmental public health goals in a way that gives companies maximum flexibility to achieve our social goals at the lowest possible costs.”

In his recent best-selling book “Nudge,” co-written with Richard Thaler, Sunstein preaches “libertarian paternalism”–two words he acknowledges have troublesome connotations when examined independently but, when combined, actually offer a foundation for smaller, better government.

“A libertarian paternalist looks at regulations like OSHA’s or EPA’s and says, ‘These are just too complex, and we’re spending too many of our resources on compliance,’” says Jamison Colburn, a professor at Penn State’s Dickinson School of Law. “‘We [should] shift the priorities a little bit to get private parties to take their own welfare more seriously.’”

Livermore anticipates that Sunstein will integrate this quietly persuasive approach into his leadership style. “The first wave of environmental public health regulation really focused on command and control regulations that were very prescriptive and very detailed, and ultimately very costly,” he says. “Although they did bring about lots of positive social results, they probably imposed more costs than might have been necessary, and Cass is certainly open to things like market mechanisms and even leveraging the power of behavioral economics to basically give people more flexibility in making choices while still achieving environmental and public health goals.”

Historically, OIRA’s administrator has functioned as a negative force to halt potent regulation, particularly in terms of the environment. Sunstein supported the nomination of his predecessor John Graham, who weakened numerous environmental regulations, including many he identified, with cooperation from industry, as “an enormous burden to the economy.”

But within Obama’s administration, there may be opportunity for Sunstein to revitalize OIRA and make it a force for change. “You have this president who has a very ambitious and exciting agenda, climate change being a leading issue and a bunch of regulatory agencies that are on the ropes where people expect them to perform better,” says Center for Progressive Reform President Rena Steinzor.

Cost-Benefit Confusion

Many of the questions over Sunstein’s nomination revolve around his embrace of cost-benefit analysis, a tool heavily used by the Bush administration for evaluating–and often squelching–regulation. Sunstein’s 2002 book, “The Cost-Benefit State,” endorses the analytical tool to promote government accountability while limiting the sway of special-interest groups. Opponents of cost-benefit analysis say it bogs down the regulatory review process and tries to put a value on human safety.

“That outmoded paradigm sees economic growth and development as opposed to environmental public health and safety regulation, that they conflict with each other at some basic level,” Livermore says. “[But] regulation can actually improve economic development.” Rather than using cost-benefit analysis to deregulate industry, he says Sunstein will likely apply economic theories to achieve maximum benefits from regulations without imposing unnecessary costs.

During his confirmation hearing, Sunstein clarified his position in line with Livermore’s prediction. “Cost-benefit analysis shouldn’t put regulation in an arithmetic straitjacket,” he said. Instead, his approach to cost benefit analysis would be “inclusive and humanized,” and, above all, would function subordinate to the law.

Setting up choices to encourage a socially favorable result indicates Sunstein will favor a market-based approach to regulation, functioning much like a cap-and-trade system for regulating greenhouse gas emissions, Livermore says. And that’s good news for in-house counsel.

“There aren’t going to be new regulations coming down the pike constantly that require companies to change their compliance and update their legal analysis and legal risks,” Livermore says. “[While] there are all kinds of legal uncertainties as these systems get put in place, there’s actually a fair amount of legal certainty going forward.”

Open for Comment

During his confirmation hearing, Sunstein said one of his primary goals as OIRA’s administrator would be to increase transparency within the agency. He even quipped about how confusing he finds the office’s Web site,

On Feb. 26, OMB Director Peter Orszag announced plans to revise Executive Order 12866 and requested public comment to help refine changes to the regulatory review process. When public comment ended, more than 180 individuals and organizations had submitted proposals.

Colburn says this transparency will help smooth the transition to the new regulatory administration, especially if OIRA’s leadership seeks to adopt controversial methods or policies. The transparency also will allow in-house counsel to help shape the new direction of the regulatory landscape.

“If you actually see a call for comments on or participation in analyses of these kinds, it’s absolutely required that you participate to make sure that your data or your perspectives are incorporated,” Colburn says. “Supposing OIRA’s regulatory review function is made more transparent and more open to public participation, those opportunities are just going to be more frequent.”