How the East Palestine derailment and Silicon Valley Bank failure are connected

March 23, 2023

Two of the biggest U.S. news stories from the past month are connected in ways that aren’t immediately obvious. Both involve the types of regulatory decisions made in the executive branch all the time, and both demonstrate the need for clearer thinking about how those decisions affect different segments of the population.

In mid-February, a train carrying hazardous materials derailed in East Palestine, Ohio. The derailment led to the evacuation of parts of the town and the release of hazardous chemicals. 

In 2015, the Obama administration issued regulations on rail safety; however, the regulations contained an exemption for vinyl chloride, one of the chemicals released in the East Palestine derailment. The Trump administration rescinded some of the Obama regulations, including those requiring electronic brakes on certain trains. It is unclear whether electronic brakes would have prevented the East Palestine crash. Regulations being discussed in the wake of the derailment include ones on the length of trains and on braking requirements.

This month brought an entirely different type of “crash.” The Silicon Valley Bank (SVB) was taken over by federal regulators in the wake of an inability by the bank to deal with poor investment choices and a mounting demand for withdrawals by the bank’s customers.

Like the East Palestine crash, the SVB failure has prompted discussion of regulatory decisions made over the past decade. In particular, the regulatory implementation of the Dodd-Frank Act included requirements for mid-sized banks that may have prevented the SVB failure, or at least alerted regulators to the dangers the bank faced sooner. Those requirements were repealed in a statute passed in 2018 with bipartisan support.

One of the first actions President Biden took upon assuming the presidency was to issue a memorandum entitled “Modernizing Regulatory Review.” The portion of the memorandum that generated the most attention was a requirement that the Office of Management and Budget (OMB) “propose procedures that take into account the distributional consequences of regulations.”

Agencies have long been required to conduct cost-benefit analyses of their most significant regulations, totaling, as best they can, the benefits to the public and the costs imposed by agency actions. The Biden memo aimed to put teeth into a longstanding but ignored requirement that agencies also take into account and make transparent the distributional consequences of regulatory decisions. The East Palestine and SVB disasters highlight the importance of this need.

East Palestine has a median household income of under $50,000, while the U.S. median household income is over $70,000. I suspect that most communities with tracks utilized by freight trains have similar income profiles. You don’t see freight trains in midtown Manhattan or in toney suburbs.

The depositors who are guaranteed their deposits won’t disappear by the government backstop of SVB are quite different. By definition, they had more than $250,000 deposited in the bank (FDIC already guarantees deposits below that amount). But the potential broader bank run that motivated the administration to create this backstop would have had much broader distributional consequences.

Regulations are not just about the efficiency concerns that are revealed in a well-done cost-benefit analysis. In fact, as the East Palestine and SVB incidents demonstrate, they may not even be primarily about efficiency. Regulation is as much about distribution as it is about overall economic impact.

Regulations that require factories to clean up the air redistribute welfare from industry and its workers to those who breathe the air around the plant. Labor regulations typically redistribute welfare from employers to employees. And regulations on train safety redistribute welfare to victims of possible derailments, and regulations on bank solvency requirements redistribute welfare to those accountholders and whoever else may be harmed by a bank failure.

Prospectively analyzing the distributional consequences of regulation is hard (as was repeatedly pointed out at a recent conference I attended). But the East Palestine and SVB news stories that have dominated the headlines show how important it is. OMB has not yet implemented the Modernizing Regulatory Review memorandum. Let’s hope they do so soon.

Stuart Shapiro is a Professor and Interim Dean of the Bloustein School

The Hill, 3/22/2023

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