[Budget of the United States Government]
[VI. Investing in the Common Good: Program Performance in Federal Functions]
[33. Regulation: Costs and Benefits]
[From the U.S. Government Publishing Office, www.gpo.gov]


 
                   33.  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. The Administration's approach to 
regulation is careful design and implementation at 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 more than 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 new 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 a variety of reasons, two of the most important of which are 
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. OMB itself 
reviews about 500 proposed and final rules per year. The Government must 
make decisions about the chemicals introduced into commerce, 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. The Government is working on 
these problems and is making steady progress on methodology and data 
collection.

  Costs and Benefits of Regulation: OMB's second survey, Report to 
Congress on the Costs and Benefits of Federal Regulations, 1998, 
presents new estimates of the aggregate costs and benefits of Federal 
regulation and regulatory programs, as well as the costs and benefits of 
major individual regulations issued during the last three last years. 
The report continues progress toward developing a system to track OMB 
performance in minimizing costs while achieving social benefits.
  The report uses information on costs and benefits published in peer-
reviewed journals, or published for public comment by agencies and 
reviewed by OMB, to estimate aggregate

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costs and benefits for four categories of social regulation: 
environmental, transportation, labor, and other social regulations, such 
as food safety (see Table 33-1).
  The estimates in Table 33-1 are presented in wide ranges to emphasize 
their inherent uncertainty, particularly with the benefit estimates. 
Moreover, only costs and benefits that could be quantified and assigned 
a dollar value are included in the estimates. The estimates indicate 
that regulation has most likely produced very large net benefits for 
society, especially for the environment and transportation. 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 broadening of 
the upper end of the range in the benefit estimates for the environment 
is largely due to an Environmental Protection Agency (EPA) report that, 
due to a court-ordered deadline did not go through an interagency 
review, and which estimates that the annual benefits of the Clean Air 
Act might be as high as $3.2 trillion. The OMB report discusses the key 
assumptions behind these estimates and specifically notes that the 
results appear to be sensitive to choices made concerning the baseline 
for the analysis and the translation of improvements in air quality to 
human health benefits.
  The benefits of transportation, labor, and other social regulation 
mainly include the value provided by improved safety and health. 
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.
  Although Table 33-1 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, OMB 
also provided estimates of the costs and benefits of 34 final 
regulations that it reviewed from April 1, 1995, to March 31, 1998, for 
which it had relatively complete monetized estimates. These 34 rules 
represent about 25 percent of the ``major'' rules--rules that are 
expected to have an economic impact on the economy of over $100 million 
--and about five percent of all the rules reviewed by OMB over this 
period.
  The 34 rules are estimated to provide $30 billion to almost $100 
billion in annualized benefits to society for about $28 billion in 
annualized costs, suggesting net benefits even at the lower benefit 
estimate. Three rules dominate these estimates: a 1996 Health and Human 
Services rule that places restrictions on the sale of tobacco and the 
two 1997 EPA rules revising the National Ambient Air Quality Standards 
for ozone and particulate matter.
  ----------------------------------------------------------------------

 Table 33-1.  Estimates of the Total Annual Benefits and Costs of Social
                               Regulations
              (In billions of 1996 dollars as of 1998, Q1)
------------------------------------------------------------------------
                                         Benefits            Costs
------------------------------------------------------------------------
Environmental.....................    \1\ 93 to 3,300         120 to 170
Transportation....................        84 to   110          15 to  18
Labor.............................       28 to     30          18 to  19
Other.............................       53 to     58          17 to  22
                                   -------------------------------------
  Total...........................       260 to 3,500        170 to 230
------------------------------------------------------------------------
Source: OMB, Report to Congress On the Costs and Benefits of Federal
  Regulations, 1998.
 
 \1\ The upper end of the range is based on an EPA report.

  ----------------------------------------------------------------------

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  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 continue to 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, and to make recommendations for better estimation techniques 
to value costs and benefits.
  OMB also will:
   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.