The report “Counting Regulations: An Overview of Rulemaking, Types of Federal Regulations, and Pages in the Federal Register” by the Congressional Research Service (Nov. 26, 2014) is the latest official pronouncement of an already well-known phenomenon—the unrelenting pace of new regulation. According to the report, our federal agencies have generated at least 3,500 final rules per year in the last 10 years, representing over 20,000 pages per year in the Federal Register.

Politicians like to focus on numbers, as well as on the administrative cost of compliance, when they talk about overregulation. But of equal importance is the hidden cost of regulation, which manifests itself in the form of unintended consequences arising from misdirected incentives. For example, regulators have tried to protect consumers from predatory lending practices mostly through the prescriptive regulation of usury, first by targeting banks, and then non-banks such as payday and auto title lenders. Unfortunately, these efforts have suppressed neither subprime borrower appetite for alternative credit, nor the ingenuity of lenders to arbitrage or game the rules to create even newer ways to satisfy the demand.

Another frequently cited unintended consequence is wholesale “de-risking” by regulated institutions to avoid the cost of compliance, which drives business to unregulated entities to satisfy economic demand.

For example, banks in Australia and New Zealand have threatened to unilaterally close or refuse to open accounts of money remittance companies to avoid the risk of not complying with the stringent “know-your-customer” rules designed to curb money laundering and terrorism financing. The episode, which raises the question of whether regulators can actually force regulated entities to engage in specified lines of business, may throw into limbo law-abiding expatriates who rely on money remittance to inexpensively move money back to their families.

The root problem is a rulemaking process that not only underestimates the administrative cost of compliance, but also does not address these hidden costs of regulation. Governed by the Administrative Procedure Act of 1946, the federal rulemaking process aims to foster accountability and public participation. The Administrative Procedure Act is supplemented by Executive Order 12,866, which requires executive branch agencies such as the IRS (but not independent agencies such as the SEC and the Federal Reserve) to undertake a regulatory impact analysis that considers the costs and benefits of economically significant proposed regulation, subject to oversight by the Office of Information and Regulatory Affairs of the President’s Office of Management and Budget.

The latest reincarnation of the Regulatory Accountability Act (H.R. 185), which the House passed on Jan. 13, 2015, and which the president has indicated that he will veto, provides a framework of welcome reform in the rulemaking process. H.R. 185 expands the mandate to perform prospective economic cost-benefit analysis to all agencies, including the vast network of independent agencies responsible for crafting much of the financial regulation that aims to avert the next financial crisis.

One problem, however, is that executive branch agencies already subject to Office of Management and Budget oversight have in many cases fared no better than the independent agencies in anticipating the cost of regulation, especially the hidden cost of regulation. For example, the total cost of the Foreign Account Tax Compliance Act (FATCA) includes not only the administrative cost of compliance, but also the cost of misdirected incentives. These include the unproductive de-risking by foreign banks, which have closed the accounts of U.S. expatriates, as well as the potential withdrawal by foreign financial institutions from the U.S. capital markets. And since FATCA regulates activity by defining the scope of covered activities by covered participants, it is only natural that the market will invent new ways to circumvent the law. Just one example is the use of free ports (which are not covered by FATCA because they are not financial institutions) to store appreciating valuables without detection.

While H.R. 185 also adds additional checks and balances that invite closer public scrutiny of the regulatory process, there is no reason to believe that H.R. 185 will be any more effective in curtailing the arbitrage by agencies of the RIA or functionally equivalent requirements to suit their agendas. According to a June 2014 article by John D. Graham and James Broughel in the Harvard Journal of Law & Public Policy: Federalist Edition, it is easy for executive branch agencies to use policy memoranda, selective enforcement and other methods to promulgate what the authors call “stealth regulation.”

To be fair, regulators can only craft rules within the parameters of enabling legislation, which is frequently dense and open-ended. Before we can improve the rulemaking process, we must consider the threshold question whether our elected leaders systematically rely on high-quality prospective economic analysis when crafting legislation. If we have a shoot-first-and-ask-questions-later rulemaking culture, it starts with elected leaders who understand the enduring nature of signature legislation, especially legislation drafted in response to crisis, for example, Dodd-Frank, FATCA and before that, Sarbanes-Oxley. Politicians have every incentive to push through enabling laws by fait accompli, without systematic prospective and publicly disclosed economic analysis (save for the analysis by the Congressional Budget Office of the impact of proposed legislation on federal spending). The question of course is whether any mandate to require elected leaders to perform and disclose the results of economic analysis when crafting enabling legislation (and ever-expansive executive action) will be any less susceptible to politically-motivated gamesmanship than the rules we already have in place for regulators.

Rapid advances in data science will one day help us to better predict the hidden cost of regulation (as well as the cost of not regulating), even though past financial crises have shown us that the future is largely unknowable. And if you believe that regulatory capture, the sometimes subliminal tendency of regulators to advance the interests of the industries that they regulate (so as to advance their own interests), is as inevitable as regulatory arbitrage, then public disclosure of economic analyses and regulatory outcomes will at least give the public a fighting chance to rate the efficacy of our laws and regulations, as well as the politicians and regulators who make them.