[Budget of the United States Government]
[VI. Investing in the Common Good: Program Performance in Federal Functions]
[32. Regulation: Costs and Be]
[From the U.S. Government Publishing Office, www.gpo.gov]
32. REGULATION: COSTS AND BENEFITS
Along with taxing and spending, the Federal Government makes policy
through regulating--that is, generally, through Executive Branch actions
to interpret or implement legislation. As with taxing and spending, the
Administration carefully designs and implements regulations to provide
the most public benefit for the least cost. The Office of Management and
Budget (OMB), the White House office that sets regulatory policy, has
adopted the following objective in its Strategic Plan: ``Maximize social
benefits of regulation while minimizing the costs and burdens of
regulation.''
The Government is still learning how to accurately estimate regulatory
costs, such as how much the private sector spends to comply with
regulations, and benefits, such as safer cars and food. For over 20
years, a series of Executive Orders has charged OMB with reviewing
regulations and providing information on their costs and benefits. The
President's September 1993 Executive Order, ``Regulatory Planning and
Review,'' directs agencies to assess the costs and benefits of available
regulatory alternatives and to issue only regulations that maximize net
benefits (benefits minus costs), unless a law requires another approach.
Developing and evaluating the best possible data on benefits and costs
are central to the Government's ability to assess how well the
regulatory system functions to fulfill public needs. To meet that goal,
OMB works with the agencies to improve the quality of the data and
analyses they use in making regulatory decisions for both proposed and
existing regulations, and to promote the use of standardized assumptions
and methodologies uniformly across regulatory programs.
Difficulties in Estimation: Estimating regulatory costs and benefits
is hard for two reasons: the ``baseline'' problem and the ``apples and
oranges'' problem.
To estimate how regulations affect society and the economy, the
Government must determine the baseline against which to measure costs
and benefits; that is, what would have happened if the Government had
not issued the regulation? But, several problems arise. First, no one
can craft such a hypothetical baseline with certainty. Second, measures
of costs and benefits often vary, depending on who is measuring.
Agencies generally support their regulatory programs and, thus, may
understate costs or overstate the likely benefits; at the same time,
businesses and others who bear the costs will likely do the opposite.
Third, the timing of estimates also may make a difference. Most
estimates are made before the regulation takes effect, but evidence
exists that once regulations are in place, the affected entities find
less costly ways to comply.
The ``apples and oranges'' problem derives from the nature and
diversity of regulation itself. Over 60 Federal agencies regulate over
4,000 times a year for a wide array of public purposes. The Government
must make decisions about the chemical composition and temperature of
the atmosphere, the accessibility of public transportation, and safety
of the Nation's food supply. Estimating the costs of such diverse
activities is hard; estimating the benefits is even harder. Fortunately,
the Government is working on this issue and is making steady progress on
methodology and data collection.
Costs and Benefits of Regulation: A recent OMB survey, Report to
Congress on the Costs and Benefits of Federal Regulations, presents
estimates of the aggregate costs and benefits of Federal regulation, as
well as the costs and benefits of major individual regulations issued in
the last year. Despite the inherent problems, the report represents a
good first step toward developing a system to track OMB and agency
performance in minimizing costs while achieving social benefits.
The report uses information on costs and benefits that was published
in peer-reviewed journals, or published for public comment by agencies
and reviewed by OMB, to estimate aggregate costs and benefits for four
cat
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egories: environmental, other social, economic, and paperwork/disclosure
(see Table 32-1).
The estimates in Table 32-1 are very rough, particularly the benefit
estimates. With that very important caveat, the numbers indicate that
regulation has produced as much, if not more, in benefits as in costs,
and that environmental and other social regulation, mainly health and
safety regulation, has clearly produced benefits significantly greater
than compliance costs.
The benefits of environmental regulations reflect the value that
society places on improved health, recreational opportunities, quality
of life, preservation of ecosystems, biodiversity, and so on. The
benefits of other social regulation include the value attributed to
reduced mortality and morbidity. Generally, the costs are the expenses
incurred in compliance, based on engineering designs and current prices,
although sometimes they properly include the opportunity costs of
foregoing the benefits of what would have been produced in the absence
of the regulation.
Economic regulation directly restricts business' ability to conduct
its main economic activities--to set prices and decide what to produce.
It may also limit business' ability to enter or leave certain lines of
work. These regulations usually apply on an industry basis, such as
agriculture, trucking, or communications. Often, economic regulation has
protected business from competition, and economic loss comes from the
higher prices and inefficiencies that result when competition is
restricted. Sometimes, however, as in the case of natural monopolies,
economic regulation simulates competition and, thus, produces benefits
to consumers. Because the Government has no reliable quantitative
estimates of the benefits of economic regulation, Table 32-1 includes
none. Most economists, however, believe that because regulatory policy
has been slow to adapt to rapidly changing technology, the costs of
economic regulation have generally exceeded the benefits. The Federal
Government has been deregulating key sectors of the economy over the
past 20 years, and many other countries have followed its lead.
The fourth category, paperwork/disclosure, includes regulations
requiring that information be disclosed about the characteristics of an
economic transaction--e.g., financial, securities, and business
transactions--so that both parties to the transaction will have the same
information. Although the Government has no reliable estimates of the
benefits of such disclosure, most economists believe that benefits
exceed costs.
Although Table 32-1 shows that, in total and for important categories,
Federal regulations have provided more benefits than costs, it says
little about current regulatory policy or how to improve it. To address
these issues, the Government needs estimates of the costs and benefits
of the incremental changes to recent regulations. In its report,
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Table 32-1. Estimates of the Total Annual Benefits and Costs of
Regulations for 1997
(In billions of 1996 dollars)
------------------------------------------------------------------------
Benefits Costs
------------------------------------------------------------------------
Environmental................................... 162 144
Other Social.................................... 136 54
Economic........................................ * 71
Paperwork/disclosure............................ * 10
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Total......................................... >298 279
------------------------------------------------------------------------
* Indicates that significant benefits remain to be quantified including
the benefits of regulating local phone monopolies and the information
disclosure requirements of the banking and capital market regulatory
agencies. Note that financial safety and soundness regulation is not
included in the above totals.
Source: OMB, Report to Congress On the Costs and Benefits of Federal
Regulations, September 30, 1997.
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OMB provided information on the costs and benefits of the 41
economically significant final regulations that it reviewed from April
1, 1996 to March 31, 1997. 1
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\1\ For a copy of this report, see the web site http://
www.whitehouse.gov/WH/EOP/OMB/html/rcongress.htm.
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Twenty-one of these rules require substantial private sector spending,
provide significant new social benefits, or both. The Environmental
Protection Agency (EPA) issued seven of these rules; the Agriculture
Department (USDA) issued four; the Health and Human Services (HHS) and
Transportation Departments each issued three; and the remaining four
were spread among the Commerce, Interior (DOI), and Labor (DOL)
Departments.
For seven of the 21 rules, monetized benefits exceeded costs. For
example, the Food and Drug Administration (FDA) estimated that its
tobacco rule would provide net benefits of $9 billion to $10.2 billion a
year. EPA estimated that its Accidental Release Prevention rule would
generate $77 million a year in net benefits. For the remaining 15 rules,
agencies did not provide enough information to estimate monetized net
benefits. For five of the 15, the agencies quantified the expected
benefits (e.g., tons of emissions reduced, number of injuries avoided),
but they did not assign dollar values to these effects and, thus, could
not calculate monetized net benefits. For five others, the agencies
identified qualitative benefits associated with the rule, but did not
develop any quantified estimates of the likely effects. For the
remaining five, agencies had very little economic data on the effects of
the rule.
Of the remaining economically significant final rules, 19 were needed
to implement Federal budget programs. These rules generally create
``transfers''--that is, payments from one group to another, such as from
the Federal Government to beneficiaries, that redistribute wealth. Eight
were USDA rules to implement Federal laws on agricultural and Food Stamp
policies; seven were HHS and Social Security Administration rules to
implement Medicare, Medicaid, and Social Security policy; two were
Department of Housing and Urban Development rules linked to Federal
mortgage protections; one was a DOL rule tied to Federal service
contracts; and one was a joint HHS-Treasury-DOL rule setting standards
for health insurance portability group health plans.
In the most basic case, transfers do not directly impose social costs
or create social benefits, and do not reflect the ``opportunity cost''
of resources used or benefits foregone. Thus, OMB did not include
transfers in Table 32-1 estimates of costs and benefits. Nevertheless,
transfers can have important effects on the distribution of income. They
may cause indirect social costs because they must be financed--for
example, by income and payroll taxes--in ways that affect the use of
real income. Similarly, transfers may generate social benefits if
beneficiaries realize marginal benefits from the payments that are
greater than the losses for taxpayers who finance them.
Further Action: The Government needs better data and analysis to
determine whether proposed regulations maximize social benefits while
minimizing cost. But agencies have legitimate reasons for their often
incomplete estimates. In some cases, they face significant technical
problems in assessing costs and benefits. In others, legal or judicial
deadlines force the agencies to act within time frames that do not allow
for adequate analysis. In still others, agencies may need to allocate
their limited financial and human resources to higher priorities.
Finally, in cases of emergencies, the public expects its elected leaders
to respond without the delay that careful analysis would entail.
OMB is committed to improving the indicators to assess its performance
in meeting the goal of ensuring that it is faithfully executing and
managing regulatory policy. It will lead an inter-agency effort to raise
the quality of analyses that agencies use in developing regulations,
such as by offering technical outreach programs and training sessions on
using OMB's ``Best Practices'' on economic analysis.
OMB also will:
subject a select set of agency regulatory analyses to peer
review in order to identify--based on actual experience--the
methodological approaches that need im
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provement and to stimulate the development of better
estimation techniques;
continue to develop a database on benefits and costs of major
rules, using consistent assumptions and better estimation
techniques to refine agency estimates of incremental costs and
benefits; and
work on developing appropriate methodologies to evaluate
whether to reform or eliminate existing regulatory programs or
their elements.
Regulation and regulatory reform can do much good for society,
depending on whether the Government has the needed information and
analysis for wise decision-making. The steps outlined above are designed
to continue the Government's efforts to improve its ability to make
better regulatory decisions.