    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

                    THE COST OF REGULATION TO SMALL BUSINESS
    =======================================================================

                                    HEARING

                                   before the

        SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT, AND GOVERNMENT PROGRAMS

                                      and

                     SUBCOMMITTEE ON REGULATORY REFORM AND
                              PAPERWORK REDUCTION

                                     of the

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                 WASHINGTON, DC
                                   __________

                                  JUNE 6, 2002
                                   __________

                               Serial No. 107-60
                                   __________

             Printed for the use of the Committee on Small Business

                          COMMITTEE ON SMALL BUSINESS

                      DONALD MANZULLO, Illinois, Chairman
    LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
    JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD,
    ROSCOE G. BARTLETT, Maryland             California
    FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
    SUE W. KELLY, New York               BILL PASCRELL, Jr., New Jersey
    STEVE. CHABOT, Ohio                  DONNA M. CHRISTENSEN, Virgin
    PATRICK J. TOOMEY, Pennsylvania          Islands
    JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
    JOHN R. THUNE, South Dakota          TOM UDALL, New Mexico
    MICHAEL PENCE, Indiana               STEPHANIE TUBBS JONES, Ohio
    MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
    DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
    SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
    EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
    FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
    TODD W. AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
    SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
    BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                         ANIBAL ACEVEDO-VILA, Puerto Rico
                          Doug Thomas, Staff Director
                      Phil Eskeland, Deputy Staff Director
                      Michael Day, Minority Staff Director
                                     ------

        SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT, AND GOVERNMENT PROGRAMS

                      JIM DeMINT, South Carolina, Chairman
    FRANK A. LOBIONDO, New Jersey        JUANITA MILLENDER-McDONALD,
    MICHAEL FERGUSON, New Jersey             California
    FELIX J. GRUCCI, Jr., New York       DANNY K. DAVIS, Illinois
    DARRELL E. ISSA, California          STEPHANIE TUBBS JONES, Ohio
    EDWARD L. SCHROCK, Virginia          CHARLES A. GONZALEZ, Texas
    SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
                                         DONNA M. CHRISTENSEN, Virgin
                                             Islands
                      Nelson Crowther, Professional Staff
                                     ------

                SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

                         MIKE PENCE, Indiana, Chairman
    LARRY COMBEST, Texas                 ROBERT BRADY, Pennsylvania
    SUE KELLY, New York                  BILL PASCRELL, Jr., New Jersey
    SAM GRAVES, Missouri                 CHARLES GONZALEZ, Texas
    ROSCOE BARTLETT, Maryland            DAVID D. PHELPS, Illinois
    TODD AKIN, Missouri                  JAMES P. LANGEVIN, Rhode Island
    PAT TOOMEY, Pennsylvania             ANIBAL ACEVEDO-VILA, Puerto Rico
                      Rocario Palmieri, Professional Staff

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 6, 2002.....................................     1

                                   Witnesses

    Graham, Hon. John, Administrator, OIRA, Office of Management &
      Budget.........................................................     3
    McIntosh, Hon. David, Former Member of Congress, Partner Mayer,
      Brown, Rowe & Maw..............................................     6
    Hahn, Dr. Robert, Director, AEI--Brookings Joint Center for
      Regulatory Studies.............................................    12
    Langer, Andrew, Manager, Regulatory Affairs, National Federation
      of Independent Business........................................    14
    Arth, Raymond, President of Phoenix Products, for the National
      Small Business United..........................................    16

                                    Appendix

    Opening statements:
        DeMint, Hon. Jim.............................................    22
        Pence, Hon. Mike.............................................    24
    Prepared statements:
        Graham, Hon. John............................................    27
        McIntosh, Hon. David.........................................    34
        Hahn, Dr. Robert.............................................    63
        Langer, Andrew...............................................    81
        Arth, Raymond................................................    89
    Additional material:
        Letter to Committee from Jonathon Zuck, President,
          Association for Competitive Technology.....................   101

                    THE COST OF REGULATION TO SMALL BUSINESS

                                  ----------

                             THURSDAY, JUNE 6, 2002

            House of Representatives, Subcommittee on
                Regulatory Reform and Oversight, and
                Subcommittee on Workforce, Empowerment, and
                Government Programs, Committee on Small
                Business,
                                                        Washington, DC.
        The joint Subcommittees met, pursuant to call, at 2:00
    p.m., in room 2360, Rayburn House Office Building, Hon. Mike
    Pence (chairman of the subcommittee) presiding.
        Chairman Pence. This hearing of the Subcommittee on
    Regulatory Reform and Oversight of the Committee on Small
    Business is convened.
        Our hearing today addresses the cost of regulation to the
    small business community. Countless efforts to reform and reign
    in the regulatory state have met with increasing resistance
    from the government bureaucracy. In 2000, the Code of Federal
    Regulations required over 74,000 pages to record every
    executive agency rule and, if laid down next to each other, the
    volumes would literally extend 19 feet in length. From 1991 to
    2000, the Code of Federal Regulations increased by 28 percent
    and showed no signs of stopping in 2000 when 4,699 rules were
    codified.
        Last year a report put out by the Small Business
    Administration's Office of Advocacy calculated the cost of
    regulations to our economy at $843 billion per year, or $8,164
    for every household. That number rivals our massive Federal
    budget this year. Even more troubling than that were statistics
    gathered on the impact of these regulations to small
    businesses. Small businesses face a regulatory burden that is
    60 percent higher per employee than large businesses. Dr. Crain
    and Dr. Hopkins estimate in their report that the average small
    business is burdened with almost $7,000 per employee in
    regulatory compliance costs. The worst offender in the Federal
    Government when it comes to disproportionate costs to small
    businesses is the Environmental Protection Agency. Fully half
    of the estimated regulatory burden for small businesses
    identified in the report comes from environmental regulation.
        One of the most powerful weapons in our arsenal dedicated
    to beating back the regulatory state is the Regulatory
    Flexibility Act; and often our chief warrior in this battle is
    the Office of Information and Regulatory Affairs, or OIRA, in
    the President's Office of Management and Budget. It is OIRA's
    mission to hold agencies accountable to the laws that Congress
    has passed and the executive orders of the President when it
    comes to performing appropriate analysis and rulemakings.
        We are very pleased to have Dr. John Graham, the
    Administrator of OIRA, with us today to testify to his progress
    in restoring the proper role of his office in the Federal
    regulatory process. Dr. Graham will also be discussing the
    Draft Report to Congress on the Costs and Benefits of Federal
    Regulations which his office is statutorily required to
    prepare. Both subcommittees have taken note of your reviews of
    existing regulations to improve their net benefits, and we look
    forward to your continued progress on reducing the cost of
    regulations that are currently on the books.
        We are also very fortunate and honored to be joined by
    former Congressman David McIntosh, my predecessor in the Second
    Congressional District of Indiana. I can say without question
    that there are very few Members of this Chamber who could rival
    his knowledge of regulatory issues or his integrity or who have
    committed themselves and so much of their time and energy and
    intellect to this issue. Clearly, your days as chairman of the
    National Economic Growth, Natural Resources and Regulatory
    Affairs Subcommittee and your work leading the Competitiveness
    Council in the first Bush administration speak to the weight
    with which your testimony is held by both of these
    subcommittees.
        We are anxious to hear your thoughts on how the regulatory
    reform initiatives which you helped put in place are working
    and how we can be doing a better job still. Your outside
    perspective is especially appreciated since it has allowed me
    to follow you in representing the second district in the great
    State of Indiana.
        On a personal note, it is delightful to see you on that
    side of the desk, though I am daily reminded how many people
    wish you were still on this side.
        In a time when our economy relies so greatly on small
    businesses to keep our country moving, we cannot afford to
    stifle that progress by continuing to pile on costly
    regulations that disadvantage these groups. Half of our
    national workforce is employed by small businesses and two-
    thirds to three-quarters of net new jobs are created in the
    small business sector. Now is the time to do everything in our
    power to limit the reach of the regulatory state and lower the
    cost of regulation to small businesses.
        We very much look forward to your testimony and to that of
    our second panel.
        We will now have an opening statement from the chairman of
    the Subcommittee on Workforce, Empowerment and Government
    Programs who is co chairing and co hosting this Subcommittee
    joint hearing, Mr. DeMint.
        Chairman DeMint. Thank you, Chairman Pence. It is good to
    have you folks here. David, it is great to have you back.
        I appreciate the opportunity in helping to convene this
    joint hearing to look at the cost of regulations on small
    businesses and entrepreneurs. As a former small businessman
    myself and a consultant to a number of other businesses, I am
    very aware of the extraordinary burden of excessive Federal
    regulations. At a recent field hearing in Spartansburg, I heard
    from a number of constituents in business who are struggling to
    comply with regulations, and it is clear that the burden is
    more cumbersome on smaller firms who do not have the resources
    to deal with it. This is very ironic that we do this, as
    Chairman Pence says, as most of the net new jobs are coming
    from these firms that we are smothering in regulations.
        It is vitally important that we pay close attention to the
    personal as well as the macroeconomic cost of regulations and
    other strictures that government unnecessarily places on small
    business owners. We on this Committee need to be an advocate
    for clearing the way for entrepreneurs to be free to run their
    businesses and not spend all of their time jumping through
    bureaucratic hoops.
        I am pleased to note that the regulations issued under
    President Bush are down in number, although they still remain
    very high. The 2001 Federal Register contains only 64,431
    pages, more than a 13 percent decline. I am concerned that the
    unelected are doing the bulk of lawmaking here in D.C. While
    unaccountable regulatory agencies issued 4,132 rules last year,
    Congress passed only 108 bills.
        The five most active rule-producing agencies--the
    Department of Transportation, Treasury, Interior and Commerce,
    and the Environmental Protection Agency--account for 48 percent
    of all rules under consideration.
        I want to thank the witnesses again who are participating
    in the hearing. I appreciate the work that has been done on the
    papers entitled ``The Impact of Regulations on Small Firms''
    and the ``Draft Report to Congress on the Costs and Benefits of
    Federal Regulations.'' I look forward to hearing about both of
    these.
        Thank you very much. I yield back, Mr. Chairman.
        Chairman Pence. Thank you, Chairman DeMint.
        The Chair will entertain opening statements from any
    colleagues who join us along the way.
        Both of these witnesses on our first panel are very veteran
    on Capitol Hill, but allow me to ask your forbearance in
    respecting the 5-minute time limit, knowing that the entirety
    of your prepared statement will most certainly be added to the
    record if you are unable to get through all of it, but we will
    also make the practice of hearing from both of our witnesses
    before the panel is presented with questions by either chairmen
    or any other members who join us in the course of the hearing.
        Our first witness in this hearing on the cost of
    regulations to small business is Dr. John Graham, who is the
    Administrator of OIRA, the Office of Information and Regulatory
    Affairs, in the President's Office of Management and Budget;
    and Dr. Graham is recognized for 5 minutes.

           STATEMENT OF THE HONORABLE JOHN D. GRAHAM, PH.D.,
          ADMINISTRATOR, OIRA, OFFICE OF MANAGEMENT AND BUDGET

        Mr. Graham. Thank you very much, Mr. Chairman--both
    chairmen, actually, for the two subcommittees hosting the
    hearing this afternoon.
        Since this is my first opportunity to testify before you, I
    thought I should say a few words about my background. I was
    born and raised in Pittsburgh, Pennsylvania, a very proud
    Steelers fan. Perhaps more importantly for the subject of this
    hearing, I was raised during a period where that city
    experienced substantial deindustrialization for a variety of
    reasons, and I saw the impacts of the lack of business growth
    and job growth as I was growing up as a young child in
    Pittsburgh.
        From there, I went to Wake Forest University and Duke
    University and then back to Pittsburgh for my Ph.D. at
    Carnegie-Mellon University. For the last 17 years, I have been
    on the faculty at the Harvard School of Public Health where I
    founded and ran the Harvard Center for Risk Analysis.
        For the topic of the hearing today, the impact of
    regulation on small business, I will start with an anecdote
    about the education of John Graham with regard to what
    regulation does to small businesses.
        My first opportunity to testify before a congressional
    hearing was on the Senate side in 1990 on a bill--on one of the
    early bills to amend the Clean Air Act that ultimately led to
    the 1990 amendments to the Clean Air Act. After I gave my
    testimony, I stayed and listened to a second panel. There were
    several witnesses from large Fortune 500 companies testifying
    in favor of multi-billion dollar regulatory programs under the
    Clean Air Act.
        That evening I went to dinner with a colleague of mine, Dr.
    Bob Crandall at the Brookings Institution, and asked him to
    explain to me what I thought was the surprising testimony of
    these Fortune 500 companies. I said, is this a case of
    progressive businesses trying to clean up theenvironment? Bob
    has a good cynical mind, and he reminded me that you have to keep in
    mind that these large corporations, when we get into regulatory issues,
    oftentimes see regulation as an opportunity to raise capital costs for
    participants in an industry and to create entry barriers for new
    companies into those businesses. So, oftentimes, we have to understand
    that regulatory issues are not an issue of business versus other
    interests in society; they are oftentimes big business versus little
    business as part of the problem.
        That leads to the key finding of the Crain/Hopkins Report
    commissioned by the Small Business Administration. Firms with
    less than 20 employees face 60 percent larger regulatory
    burdens per employee than firms with greater than 500
    employees. So I think it is important to realize that
    regulation for--particularly for larger companies, in certain
    circumstances they see that as a competitive advantage relative
    to small companies.
        There is, I think, an important piece of missing
    information in my written testimony. While we have information
    on the cost side of regulation by size of business, we have not
    yet been able to collect information on the benefits of
    regulation by size of business. In order to have a much more
    concrete handle on what the overall impact of regulation is, it
    would be useful to have that information on benefits as well as
    costs.
        I also wanted to make a point about the Unified Regulatory
    Agenda of the Federal Government, which was released last
    month. It lays out the pipeline of regulations expected over
    the next year in the Federal Government. As the so-called
    regulatory czar of the Federal Government, I would like to
    believe that we are in control of all of this activity but, in
    all candor, that is a little difficult to do.
        There are some interesting pieces of information from this
    agenda. First of all, the Agenda lists economically significant
    rules that cost the economy more than $100 million. The
    agencies that have most of those in the pipeline are one, EPA;
    two, HHS; three, U.S. Department of Agriculture; four,
    transportation; and five, the FCC.
        However, there is a separate piece of information in this
    agenda about rules in the pipeline that will have impacts on
    small businesses. I think it is a very interesting list,
    because it has a slightly different flavor to it. The top five
    agencies are the FCC, HHS, Commerce, Transportation, and SEC.
    If you take the independent agencies out, FCC and SEC, then you
    add USDA and EPA. I think an important thing to keep in mind
    there is the executive order we operate under at OIRA does not
    currently have authority for regulatory review over these
    independent agencies.
        With regard to collaboration in terms of small business
    issues, we have recently signed a memorandum of understanding
    with the Advocacy Office at the Small Business Administration
    Tom Sullivan and I will be working together to try to
    coordinate our evaluation of rules for small business impact.
    To make a long story short, we have committed that, on our end
    of the bargain, we will look carefully at any regulation with
    an impact on small business, and if they have not adequately
    taken into account the impact on small business, we will return
    that rule to the agency for reconsideration.
        I have a more extensive set of remarks in my written
    testimony, but I hope I have kept within the time limit. Thank
    you.
        Chairman Pence. Well, you have. Thank you, Dr. Graham, for
    those insightful remarks; and we look forward to--both chairs
    look forward to dialoguing with you about the issues that were
    raised. We will enter your entire prepared statement into the
    record, without objection.
        [Mr. Graham's statement may be found in the appendix.]
        Chairman Pence. Our second witness is a former Member of
    the House of Representatives.
        Congressman David McIntosh is a partner at Mayer, Brown,
    Rowe and Maw. He served in this institution from 1995 to 2001,
    where he chaired the National Economic Growth, Natural
    Resources, and Regulatory Affairs Subcommittee of the
    Government Reform and Oversight Committee. As I mentioned
    earlier, he was the Executive Director of Vice President Dan
    Quayle's Council on Competitiveness.
        While a Member of Congress, he authored many signature
    pieces of legislation, including, most notably, the
    Congressional Review Act, which became law and was deployed
    even by this Congress in its early days to address concerns
    Members of the House and Senate had over onerous regulations in
    the area of ergonomics. He has left an enormous footprint on
    this institution in the area of regulatory reform in
    particular, and we are honored to have him here.
        The gentleman from Indiana is recognized for 5 minutes.

      STATEMENT OF THE HONORABLE DAVID McINTOSH, FORMER MEMBER OF
      CONGRESS, PARTNER MAYER, BROWN, ROWE & MAW, MUNCIE, INDIANA

        Mr. McIntosh. Thank you, Mr. Chairman. Thank you both,
    Chairman DeMint and Chairman Pence. It is an honor to be here
    sitting in this seat before you.
        I would say, Mr. Pence, there are four members of the
    McIntosh family that are indeed glad that we have traded
    places; and I want to commend you on the great job you are
    doing and urge you to continue.
        It is also an honor to be here with the OIRA administrator,
    Dr. Graham; and I would second his initial insight about the
    tension between big business and small business. In fact, over
    and over again, it has come to my attention that that is what
    is behind many of the regulatory initiatives.
        In fact, when I worked with Vice President Quayle, a well-
    intended lobbyist from one of the Nation's large businesses
    came in and said, we like what you are doing in cutting back on
    unnecessary regulation, but do not forget there are some
    regulations that are good. And I said, which ones do you have
    in mind? He said, well, there are some that we like because our
    competitors cannot quite comply with them yet. A moment of
    candor, and it gave me a great insight into what perhaps some
    of the motivation was behind different programs.
        So, John, I would wholeheartedly agree with you and keep
    that perspective.
        What I would like to do today is focus on a couple of main
    points in my testimony, and then perhaps others can be explored
    in response to your questions.
        First, the Crain/Hopkins study I think is alarming in that
    it shows that the costs are so high, $800 billion, that the
    disproportionate impact on small businesses, a 50 percent
    higher cost per employee, which effectively means every day
    when they are deciding do I add another employee to my
    business, they realize that it is going to cost them on the
    order of $8,000. It is an inhibitor for job growth and for
    recovery in our economy. I think it is alarming and something
    that everyone in the administration and in Congress should take
    to heart.
        Looking at SBREFA and the way it has been functioning,
    there are many good things in there in terms of furthering the
    emphasis on cost-benefit and looking at the impact on small
    business, but there are a few ways in which I think this
    Congress could try to strengthen that act, and I wanted to
    particularly draw your attention to those.
        One of them is that the 605(b) certification process seems
    to be greatly abused, where an agency does not have to go
    through a review of what the costs are to small business if
    they certify that the regulation will not significantly impact
    the small business. I would suggest that Congress look at a
    mechanism, perhaps similar to what it has set up in the
    Paperwork Reduction Act, where a central office has to sign off
    on that certification, perhaps OIRA, perhaps the SBA chief
    counsel, before that certification can allow them to escape the
    requirements for doing an impact analysis.
        The second point is that the regulations should clearly
    apply to standards that are not directly administered by an
    agency but set the standard for regulations at the State level.
    You think of the ozone and particulate standards that EPA
    issued a few years ago. They claim they did not have to do a
    small business impact, even though it would cost hundreds of
    millions of dollars to small businesses, because, ultimately,
    all it did was set a standard that then 50 State governments
    had to implement in their clean air regulations. So by
    extending the application of SBREFA to those type of
    regulations, I think you would do a great service.
        The third is to more explicitly include an estimate of cost
    in the impact analysis. There I think OIRA has a tremendous
    definition of what costs and benefits should be included in
    their analysis, extend those definitions statutorily into what
    should be done by the agencies to make it clear that they have
    to identify cost as they do their analysis.
        Then, finally, one of the things that I think would be
    helpful is to direct the courts to give deference to the Small
    Business Administration in determining cases on how SBREFA
    should be applied to the agencies. Normally you have, under the
    Chevron decision, a great deal of deference to the agency that
    administers a program, but in this case, because the Small
    Business Administration does not actually administer the
    regulatory program, their view of what is required under SBREFA
    is not granted that type of judicial deference. You have a very
    good set of people there in the Small Business Administration
    who are familiar with the type of problems that different
    regulatory programs cause and direct the courts to give them
    that deference.
        The other parts of my testimony I would be delighted to
    talk with you about in question and answers, and I do
    appreciate you holding this hearing so that you can raise the
    standard for people in government and outside of government.
    Thank you.
        Chairman Pence. Thank you. We will enter the balance of
    your prepared remarks in the record for this hearing without
    objection.
        [Mr. McIntosh's statement may be found in the appendix.]
        Chairman Pence. I want to defer to Chairman DeMint, since I
    gave the first opening statement, if he wants to begin the
    questioning.
        Chairman DeMint. That is the kind of thing I guess that is
    politically good to talk about, and ever since I have been here
    we talk about the regulations and the cost, particularly on
    small businesses. I have had a lot of hearings myself. I,
    frankly, would like to know from you two if you had one
    suggestion as far as what we could do, not just as a part of
    this Committee, because this Committee needs the help of a
    number of others and the leadership to actually make some
    things happen, but what would you suggest we do to begin to
    make a dent in what is obviously a bad situation for our
    economy and our global competitiveness and the encouragement of
    entrepreneurism and innovation? I am just looking for a few
    little things I can sink my teeth into and maybe actually try
    to get something done. So I will start with you, Dr. Graham.
        Mr. Graham. Well, let me start on the analytic side of the
    case for reform of regulation to protect small business. I
    think there has been, for a number of years, a good analytic
    case of the substantial costs of regulation on the small
    business community and the disproportionate nature of that
    cost. My own opinion is that the weakness in the analytic case
    is that we do not have the parallel body of information on the
    benefits side.
        The reason why that is important is that many people who
    believe that sometimes regulation is necessary fear that if we
    were to take away regulatory protections, it could either harm
    the consumer, the worker, or the environment or so forth. Until
    we get a good analyticfoundation--like we have provided on the
    cost side of the ledger--on the benefit side of the ledger, we are
    always going to be vulnerable to people speculating about what is going
    to happen if you remove these regulations. I think that there should be
    no one in either party or of any ideology that should be against a good
    collective and a good objective body of information of what we really
    know about the benefits of these regulations that disproportionately
    impact small businesses.
        Mr. McIntosh. Let me add to that something that Dr. Graham
    worked on prior to coming to government. Risk assessment should
    be a key part of that benefit analysis, because it lets you in
    many ways prioritize which type of regulations give you, in the
    terms of health rather than cost, the greatest benefit,
    something we tried to do when I was in Congress but were unable
    to because of the political configuration of the Senate in the
    Clinton administration. That is a large project but one well
    worth fighting, because essentially what it does is it directs
    this whole regulatory apparatus towards maximizing the benefits
    out of it. They focus on those things that are most risky to
    people. Believe it or not, that is not what the government does
    currently, time after time.
        I guess if there were a statutory provision that I would
    recommend that focus be put on in terms of SBREFA, I think it
    would be that certification process where you have a mandatory
    check off by that centralized agency. The Paperwork Reduction
    Act is probably the most successful of all of the different
    congressionally created or administratively created review
    processes, because the form is invalid if the agency does not
    comply with it. Dr. Graham administers that program in OIRA.
        Taking a look at it from a larger scheme, there are two
    notions that I did not mention in my testimony but I think are
    important to start the dialogue on. One is finding a way to
    have more accountability by elected officials for regulatory
    decisions.
        The Congressional Review Act was a start in that direction,
    but one way conceptually to really make that effective is to
    change the presumption. The presumption in the Congressional
    Review Act is, if Congress does nothing, the regulation goes
    into effect. If you flip that and say until Congress ratifies
    the decision by the agency, and you would obviously have to
    limit it to major regulations or significant impact
    regulations, that would change the whole dynamic.
        Now, having sat in your seats, there is a lot of
    consequences that go with that, and there will be a lot of your
    colleagues who are perhaps happy not to have that type of
    accountability. There is a record created if they vote yes or
    no on a clean air regulation. But I think in our democratic
    system that type of accountability will lead to a better
    product by the Federal Government.
        The second large conceptual issue that I would love to see
    people work on is taking a look at the enforcement side and
    asking ourselves, what has happened in the last 100 years as we
    moved from an administrative state that did not have these
    regulatory bodies into a regulatory state for much of the
    Federal programs? Specifically, what has happened to the
    procedural protections in the Bill of Rights when those rules
    and regulations are enforced?
        It would be my premise that many of those protections have
    gone by the wayside. You still technically have the right to
    have your day in court and the fifth amendment, the seventh
    amendment, all of the different protections that go with that,
    but the reality is the enforcement of most of these programs is
    done by injunction, it is done by failure to give approval for
    a new product, it is administered through processes and
    remedies that the government has that are extrajudicial.
        One thing Congress should look at is, how do we apply those
    Bill of Rights or the concepts in the Bill of Rights to provide
    protection to the innocent citizen or small businessman or
    company when they are up against the leviathan of big
    government implementing these regulatory programs? It would
    protect against the petty bureaucrat who has a lot of power and
    very little control and oversight, but it would also, I think,
    force the government to do a better job in selecting how they
    enforce these regulations in the same way we feel that the Bill
    of Rights helps ultimately law enforcement do a better job of
    focusing in on its efforts to apprehend criminals.
        So those are two large conceptual areas that much work
    would need to be done to lay the groundwork to support those.
    But if you are of interest in those, I would be delighted to
    further work with you on them.
        Chairman DeMint. I hope to follow up, and I thank you.
        I yield back, Mr. Chairman.
        Chairman Pence. Dr. Graham, first, a very specific question
    that has to do with the status of the executive order that the
    President promised on March 19 of this year. What is the status
    of that order from the perspective of your office?
        Mr. Graham. Well, I can tell you what I know about the
    status of it. The executive order process involves first the
    Executive Office of the President getting comfortable with a
    first draft and then sharing that with the agencies for
    interagency review. Then we come back and try to resolve any
    issues that are involved. So that is the three-step process.
        We are launched now into the second step where there is a
    draft, and it is undergoing interagency review. There will be
    comments taken, and then there will be a final piece put
    together.
        But you can be assured that there are people working hard
    on that, and we are definitely committed to an executive order
    that in particular will strengthen the ability of the Advocacy
    Office at the Small Business Administration to do their work
    and assure that agencies comply with the Reg Flex Act.
        Chairman Pence. Well, let me say from the standpoint of
    this Subcommittee it would be our hope and, frankly, our
    expectation that the executive order have the strongest
    possible language to give the OIRA and SBA's Office of Advocacy
    the tools they need to ensure that agencies comply with the Reg
    Flex Act; and that, if that was not the case, that you might be
    able to carry back to the deliberations that certainly this
    Subcommittee and perhaps Mr. DeMint's Subcommittee and maybe
    the full Small Business Committee would likely have a hearing
    on that issue, if not more.
        Let me go specifically to some of your prepared testimony
    that I looked at last night. In today's remarks, you used the
    phrase that OIRA is prepared to return any draft rules for
    agency reconsideration if they have not taken into
    consideration the impact of a draft rule on small business as
    required under Reg Flex Act. How do you plan to decide--how
    does your office, rather, plan to decide if an agency has taken
    small business into consideration? What is the objective or
    subjective standard for that reconsideration?
        Mr. Graham. Excellent question.
        I guess the first point I would make, to be candid, is that
    the Office of Information and Regulatory Affairs is an
    organization that has a career staff of about 50 employees, and
    that compares to on the order of thousands upon thousands of
    people in the various agencies. We have 4,000 regulations each
    year--600 of them are significant, 50 to 100 of those are
    economically significant. So the first point I want to make is
    that, given all of the considerations that we look at when we
    review a regulation, while the small business consideration is
    extremely important, there are a variety of other
    considerations that are mandated in the executive order. For
    example, we look at overall cost-benefit on society--and that
    is why we believe that the role of the Advocacy Office at the
    Small Business Administration is, in fact, so critical.
        Because we do not have the detailed staff understanding of
    guidelines around what is an adequate analysis for small
    business, we do not have the experience of dealing with
    agencies specifically on small business issues that the
    Advocacy Office has. We will be looking to Mr. Sullivan to give
    us an objective opinion on each of these rules on whether or
    not the agency has, in fact, treated the small business issue
    fairly.
        Now what we have pledged to do in the memorandum of
    understanding is, if Mr. Sullivan's office indicates that there
    has not been an adequate regulatory flexibility analysis and if
    we believe that judgment is a reasonable one, then basically we
    do not need to get to a lot of other issues. My boss, Mitch
    Daniels, has told me that, at that point, the rule goes right
    back to the agency.
        Chairman Pence. Okay. One question for Mr. McIntosh. I am
    very intrigued by some of the proposals that came up in your
    testimony with Chairman DeMint. But, specifically, in your
    written testimony you spoke about a new role for OIRA and SBA's
    Office of Advocacy in agency reg-flex certifications. Can you
    expand on that, what the impact of that would be and what
    specifically you were alluding to?
        Mr. McIntosh. The practical impact would be to take the
    process that Dr. Graham just described and make it mandatory,
    that some combination of those two offices would have to
    grant--and the way they do it in the Paperwork Reduction Act is
    they give a number that is put on the form that shows it has
    been cleared by OIRA, but some indication to the world that
    that impact analysis has been signed off on. Perhaps because of
    staffing constraints, maybe the Small Business Advocacy Office
    is the best of the two, or let the President decide. There are
    ways, multiple ways Congress could choose to do that.
        But essentially what it does is give private rights to the
    regulated community. If those regulations have not had the
    impact analysis done adequately, then the regulation would not
    be enforceable against those small business entities. A
    powerful tool, because what it does is it dramatically
    increases the seriousness with which the agencies have to do
    that review.
        One other thing. Data collection that you all could
    consider along the way would be--my recollection was that GAO
    did a study in the Clinton administration that was referred to
    the Subcommittee I chaired on compliance with SBREFA, and you
    might consider asking GAO to update that study to see--and
    that, I think, would help Dr. Graham also in identifying if
    there are some agencies that have a tendency to ignore the
    requirement for the small business impact.
        Chairman Pence. I am told that Chairman DeMint for this
    panel did not have any additional questions, so I will maybe
    offer one generic question to both of our witnesses before we
    dismiss and go to the next panel. It might have to do with what
    Congressman McIntosh was just alluding to, and that is the data
    issue. How do you think we can improve the data that is
    available on the impact on small businesses that you have? Are
    there recommendations that these subcommittees could consider
    and proposals Congress could consider?
        I will recognize Dr. Graham first.
        Mr. Graham. Well, I cannot give you a comprehensive answer
    to that question, but I think I can give you a very interesting
    example of the problem we face with data.
        The National Highway Traffic Safety Administration, the
    organization that regulates car safety and tire safety, is now
    in a major proposed rulemaking on improving the quality of
    tires. In their proposed rulemaking, they have apparently
    determined that there are no small businesses affected by the
    particular proposed rule dealing with tire safety. We have had
    both letters and visits from companies--people who are in the
    tire business, who profess to me that they are executives in
    small businesses, who look, as far as we can tell, like they
    are small businesses. Yet we have an official Federal Register
    notice out there by the Federal agency stating there areno such
    businesses in the United States of America.
        It is fascinating to me to think through the question; how
    are we going to get agencies at least to the point that they
    are aware that there are small businesses in some of these
    industries that they are proposing rather substantial
    regulations to affect?
        Now, I think those businesses did submit comments through
    the public comment process to NHTSA. We are certainly hopeful
    that they will take seriously their concerns. But obviously we
    have a data problem when we have agencies declaring that there
    are no small businesses within a particular industry, when, in
    fact, we are having visits from businesses who are well aware
    of these regulations and concerned about them.
        Mr. McIntosh. Let me mention one other idea that has been
    worked on in the past and I think would help in the acquisition
    of data. That would be a move toward a regulatory budget that
    would be in the same time frame and the same process to the
    spending budgets that the agencies put forward, again, with OMB
    in the same role they are as with the budget, having a lot of
    insight and control over what the agencies do to make sure they
    comply with the President's policy directives. There is a lot
    of work that would need to be done, but the requirement of a
    budget would then force agencies to provide data about what are
    the costs and benefits of their various regulatory programs.
        Chairman Pence. On behalf of both subcommittees, allow me
    to thank this panel for your very thought-provoking commentary.
    With that, you are dismissed; and we will invite our next panel
    to take their seat at the table.
        Mr. Graham. Thank you to both of you.
        Mr. McIntosh. Thank you very much.
        Chairman Pence. We will now entertain testimony from the
    second panel in this hearing on the cost of regulations to
    small business convened by the Subcommittee on Regulatory
    Reform and Oversight and the Subcommittee on Workforce,
    Empowerment, and Government Programs of the Committee on Small
    Business.
        We welcome our new panel. We thank you for your willingness
    to participate in the process; and, as was mentioned to the
    previous panel, you will be recognized for 5 minutes. We ask
    you to respect the light board in front of you and conclude
    your remarks at the appropriate time. Knowing that all of your
    prepared remarks will be entered into the full record of this
    hearing, so you need not feel hurried or rushed but rather
    might take the minutes that you have to amplify points that
    might be of particular interest to the two Chairs represented
    here.
        Next, the subcommittees will hear from Dr. Robert Hahn. Dr.
    Hahn serves as the Director of the AEI-Brookings Joint Center
    for Regulatory Studies, as well as a research associate at
    Harvard University. Dr. Hahn has his Ph.D. in economics from
    the California Institute of Technology and previously served as
    a senior staff economist in the President's Council of Economic
    Advisors. He has written extensively on the topic of regulation
    and is regularly consulted by government agencies for his
    expertise and acumen.
        Dr. Hahn, we are grateful for your participation in this
    panel and for traveling to this joint hearing. You are
    recognized for 5 minutes.

      STATEMENT OF DR. ROBERT HAHN, DIRECTOR, AEI-BROOKINGS JOINT
                     CENTER FOR REGULATORY STUDIES

        Mr. Hahn. Thank you, Chairman Pence and Chairman DeMint. It
    is a pleasure to be here. I think looking at the impact of
    regulations on small business is a very important topic, and I
    think Dr. Graham and former Congressman McIntosh made several
    points that I would agree with, and I am not going to dwell on
    them.
        My general view of the impact of regulation on small
    business is related to a quotation I think that was due to
    Oscar Wilde where he said, ``I have been rich and I have been
    poor and rich is better,'' and for those reasons, you might
    imagine why small business sometimes gets the short end of the
    stick.
        One of the issues that you raised, Chairman Pence--and Dr.
    Graham, who was formerly my colleague at Carnegie-Mellon, I
    know is intensely interested in--is how you get better
    information into this process? I simply want to state for the
    record that I think the general quality of information is
    fairly poor in the regulatory process, and the Joint Center has
    several researchers who did a study that I cite in my
    testimony, which talks about the fact that many of the
    regulatory analyses that we reviewed over the last several
    years did not even seriously consider regulatory alternatives
    or costs and benefits. So it is hard to make a strong claim
    that the quality of information that we are getting generally
    is very good.
        What we tried to do in this joint testimony--and I should
    say that it is joint testimony with my co-director, Bob Litan
    of the Brookings Institution, who sends his regrets for not
    being able to be here today--is to develop a set of
    recommendations that we think would engender bipartisan
    support. They are probably not as far as we would go
    individually as economists, but, nonetheless, we recognize or
    at least we think there is not a very strong sentiment for
    changing the world radically with respect to regulation and its
    reform right now. So we think some incremental steps in the
    direction of reform would be welcome.
        We go a little bit further in our comment on the OMB draft
    report, which I also left on the table over there and would be
    happy to e-mail to you if you would like to see it.
        So let me just briefly turn to the recommendations. We can
    talk about them, and feel free to stop me if you have
    questions.
        The first one, though it might seem unobjectionable, is not
    happening as quickly as we might like. That is for the agencies
    to get the regulatory information out there before the
    decisions are actually made. Specifically, we say that Congress
    should require that agencies make each regulatory impact
    analysis and supporting documents--and I think that is
    important--available on the Internet before a proposed or final
    regulation can be considered in the regulatory review process.
    Why? Because we think one very important aspect of improving
    Federal regulation is increasing transparency in the regulatory
    process. We have the Internet out there. Why not make better
    use of it?
        Dr. Graham has done a great service to the public by
    putting more and better information on the OMB website. I think
    some of the other agencies are moving in that direction. I
    would like to see them move faster, and I would also like to
    see that include independent agencies.
        Our second recommendation may sound surprising. All we
    would ask is that in the regulatory impact analysis that
    agencies are required to do for regulations that would impose
    burdens on the economy exceeding $100 million annually, that
    they include a simple executive summary with what we call a
    standardized regulatory impact summary. I include an example of
    the regulatory impact summary at the end of the testimony. It
    contains questions such as; Did you consider cost? Did you
    consider benefits and so forth? What is your bottom line?
        So, if you are not interested in reading 300 pages of
    gobbledygook you can see what the bottom line is very quickly,
    or your staff can cut to the chase fairly quickly.
        Our third recommendation, which is something I feel most
    strongly about, is that the Congress consider establishing what
    we call Congressional Office of Regulatory Assessment. The
    essential idea is to be a counterpart to OIRA. Why? To keep it
    honest. We have the same process going on now with the
    Congressional Budget Office and the Office of Management and
    Budget. We already have legislation on the books, I believe, in
    the Truth in Regulating Act that puts this function at GAO.
        Both Professor Litan and I think it would be a really good
    investment to appropriate the $5.2 million annually for the
    pilot project at GAO that is in that legislation. We think that
    OMB is constrained in what it can say about certain regulations
    because it is part of the White House and the executive
    apparatus. Having an agency that is outside of OMB providing an
    independent assessment is a good thing. So that is our bottom
    line there.
        I see that I am out of time. I will stop there; and if you
    want to talk about any of my other recommendations, we can do
    that. Thank you very much for giving me an opportunity to talk.
        Chairman Pence. Thank you very much, Dr. Hahn. I am sure
    that Chairman DeMint and I will both have questions to follow
    up on your prepared remarks and your comments today.
        [Mr. Hahn and Mr. Litan's statement may be found in the
    appendix.]
        Chairman Pence. The subcommittees will now hear from Andrew
    Langer, who is manager of Regulatory Affairs at the NFIB. Mr.
    Langer previously served at the Competitive Enterprise
    Institute and Defenders of Property Rights and is recognized
    for 5 minutes with appreciation.

       STATEMENT OF ANDREW LANGER, MANAGER, REGULATORY AFFAIRS,
              NATIONAL FEDERATION OF INDEPENDENT BUSINESS

        Mr. Langer. Thank you, Chairman Pence and Chairman DeMint.
    It is my pleasure to be here before you today representing the
    National Federation of Independent Business.
        A reasonable government regulation, especially on onerous
    paperwork burdens, continues to be a top concern. Regulatory
    costs per employee are obviously, as we have said, highest for
    small firms; and our members consistently rank those costs as
    one of the most important issues that NFIB should be working
    on. Thus, I am very pleased to be here to offer my perspective
    on behalf of the regulatory state on small business.
        Our members view regulation as a serious problem. Most
    small business owners are unhappy with the difficulties
    regulation creates and the time it takes them away from their
    business, rather than any limitation on freedom those
    regulations might impose; and they identify Federal regulation
    as the biggest culprit in creating those difficulties.
        The volume of regulation, obviously, is enormous. We all
    know just how long the CFR--how far the CFR is, how long it
    extends, 19 running feet; and that is only codified rules and
    not the other myriad documents that small business owners must
    follow.
        But most important, of course, is the direct costs. As we
    have said, a couple of people have said repeatedly here, for
    businesses with fewer than 20 employees, which accounts for
    roughly 90 percent of all small businesses, the cost of
    regulation per employee is nearly $7,000. Health, safety and
    environmental regulations are a huge chunk of this, of course,
    and the Crain/Hopkins study confirmed that.
        But, unfortunately, it is difficult for our members to
    point to a single regulatory scheme which poses problems. To
    them, regulation is death by 1,000 pinpricks, the sheer volume
    of requirements coming at them from every direction.
        NFIB continues to examine the impact that multiple agencies
    and duplicative regulatory regimes have when dealing with a
    single regulated entity. To us, a prime candidate for further
    examination is the soon-to-be-implemented reporting requirement
    for lead under the toxicsrelease inventory. This new standard
    alone will, by EPA's own estimates, cost a small business owner 60
    hours to prepare their necessary paperwork, and if errors should be
    found by EPA in that paperwork, an owner will spend an additional full
    business week correcting that problem instead of engaging in their
    business. Clearly, this is problematic, especially for a regulation
    which may not ought to have been implemented in the first place.
        On the other hand, it is the paperwork associated with tax
    preparation that our members cite as their biggest regulatory
    headache. What began in 1913 as a two-page form backed up by 14
    pages of law has now become a 17,000-page maze that requires
    703 different forms. The Tax Code's 5.5 million words have
    created a nightmare of complexity that zaps the economy's
    strength by punishing work, saving, investment, risk taking and
    entrepreneurship, the backbone of our economy.
        We believe Congress can make great inroads into relieving
    tax-related paperwork by, for instance, increasing section 179
    expensing limits, addressing the alternative minimum tax,
    establishing a standard home office deduction, and clarifying
    the definition of what it means to be an independent
    contractor.
        But NFIB wants to make certain that both subcommittees are
    aware of the efforts being made by this administration to shape
    policies which are small-business-friendly. As you know,
    President Bush himself made a commitment on this when he
    outlined his proposals on behalf of small business, and the IRS
    continues to address small business owners' greatest headaches
    with tax paperwork by, for instance, clarifying the rules on
    cash versus accrual accounting methods.
        We are also pleased with how SBREFA requirements are being
    met by this administration but believe that, as always, more
    can be done. OIRA and SBA have continued to be particularly
    helpful. Not only has the Office of Advocacy board been working
    closely with OIRA in improving regulations themselves, but both
    are making great strides in reducing the overall burden by
    making what remains easier to understand. OIRA's efforts can
    only serve to benefit the small business community; and the use
    of such tools as prompt letters, return letters and especially
    comparative risk analysis will only help improve the regulatory
    state.
        But one of our concerns is that OIRA, an organization that
    really does ``get it,'' may not have the manpower necessary to
    take on the Herculean task of a regulatory state that continues
    to grow. And I would ask--we would ask that among the
    recommendations that your Committee ultimately makes is to help
    OIRA by giving them the tools necessary to deal with what is
    absolutely an essential job.
        We also appreciate the SBA administrator's efforts and
    those of his team. The Office of Advocacy is at the forefront
    of groups fighting on behalf of small business owners
    everywhere; and we are grateful that the Ombudsman Office, one
    that really has not gone recognized in this hearing, has made a
    strong commitment to ensuring that our members and other
    members of the community are not trampled by agency
    overreaching.
        Thank you all for the opportunity to testify, and I look
    forward to any questions that you might have.
        Chairman Pence. Thank you, Mr. Langer.
        [Mr. Langer's statement may be found in the appendix.]
        Chairman Pence. Our last witness comes not from the halls
    of government or the academic world but brings with him the
    bona fides of the trenches of small business America. We may
    well have saved the best for last.
        The Chair recognizes the small business owner from Avon
    Lake, Ohio, Mr. Raymond Arth. Mr. Arth is President of Phoenix
    Products, a Cleveland-based faucet maker. Mr. Arth also serves
    as a member of the National Small Business United Board of
    Trustees and is currently chairman of their Legislative Affairs
    Council.
        We are grateful in the midst of your busy schedule that you
    would travel to our Nation's Capital and bring your particular
    expertise to this conversation today. And you, Mr. Arth, are
    recognized for 5 minutes.

    STATEMENT OF RAYMOND ARTH, PRESIDENT OF PHOENIX PRODUCTS, AVON
           LAKE, OHIO, FOR THE NATIONAL SMALL BUSINESS UNITED

        Mr. Arth. Thank you, Chairman Pence and Chairman DeMint.
        Chairman Pence, you have already done my introduction for
    me, so we will see if we can get this done in a little less
    than 5 minutes.
        As a small business owner and as a representative of
    National Small Business United, I can tell you that we support
    many of the points that have already been made, and I will try
    to avoid repeating information that has already been given.
        The Crain-Hopkins report has had a lot of attention. I will
    tell you as a small business owner that the numbers feel right.
    There are people in my company and activities that we do that I
    can point to and say, this has nothing to do with running my
    business; this has to do with keeping me out of jail, avoiding
    penalties, avoiding fines, and so forth. And, unfortunately, a
    lot of those activities aren't necessarily making my workplace
    safer, making my benefits more fair to the employees, and
    things like that.
        I think the numbers have a certain feel that, as I say, it
    kind of feels right to me. And to cite one number, they
    mentioned that the cost for manufacturers, which would be me,
    is about 3.4 percent of revenues. That is greater than my
    historical net before taxes earnings over 25 years in business.
    That is millions of dollars that my company has spent that
    didn't go into new products, improving processes, creating new
    jobs. And while not all regulations are bad, a lot of the hoops
    we have to jump through, as I say, don't make the world any
    safer, don't make our products any safer, and doesn't improve
    the workplace to a great degree.
        I also would like to emphasize a point that was made
    earlier in testimony about the impact that regulations have on
    job creation. Three years ago it was a stated goal at our
    company to increase our output without increasing employment.
    We had 98 employees at that time. We did not want to pierce the
    100-employee threshold because a new round of regulations kick
    in at that point. Unfortunately, fate and the economy have
    intervened, and today we are now down below about 60 employees.
    But, again, recognizing the costs associated, we don't run out
    and add bodies, we try to find other ways to get production
    done and other ways to run the business without adding to the
    cost of payroll and full-time employees.
        I would like to focus the balance of my comments here on
    that portion of my testimony that referred to a tax study that
    was recently completed and issued by NSBU. It was conducted for
    them by the Prosperity Institute, and the point of that study
    was to really focus on the way that the Income Tax Code
    deliberately or inadvertently discriminates against small
    business. The report has been circulated; I have a copy here
    that I could leave as part of the testimony, if that's
    appropriate, and it would be available at the NSBU Website,
    www.nsbu.org.
        But essentially what they have done is looked at the way
    the Internal Revenue Code tilts the game in favor of bigger
    companies, in favor of C corporations versus sole
    proprietorships, kind of perverse situations where we want to
    encourage small businesses to offer fringe benefits, but we tie
    the hands of the small business owner in terms of the
    deductibility of their own costs for the benefits they offer to
    their employees; rules for qualifying plans that make it
    difficult to offer qualified benefits in the smallest
    companies; situations where you need at least seven employees
    before you would be able to meet the matching tests to have a
    qualified life insurance program, for example; all sorts of
    top-heavy testing that is required of small business owners.
        I sponsor a 401(k) plan. I match my employees'
    contributions. That match almost literally comes out of my left
    pocket, which is the one I think of as the business, as opposed
    to the right pocket; yet my contributions to the plan are a
    function of my employees' contributions. There is no
    counterpart in the large corporate world where the owners, the
    leaders of those companies, have their hands tied, have their
    benefits restricted the way we do in small business.
        And perhaps what is most frustrating about all of that is
    that it is hard to understand some of these rules, some of
    these regulations unless you assume that the people who enacted
    them believe that as a small business owner I am dishonest, I
    am unethical, I am ignorant, maybe I am stupid, because
    otherwise a lot of these things just don't make sense. It takes
    quite a toll as well.
        That said, I think I will wrap up my comments and be glad
    to answer any questions. Thank you.
        [Mr. Arth's statement may be found in the appendix.]
        Chairman DeMint. Mr. Langer, you mentioned the Tax Code,
    and that is probably the biggest regulatory problem of small
    business, and certainly I have experienced that. Does NFIB
    support a particular type of tax reform? And I hope you would
    support the current sunset, the Tax Code proposal that we are
    trying to get back on the floor.
        Mr. Langer. Well, we are working on a number of different
    things. To be honest, tax issues aren't my specialty. I came on
    board NFIB just under 2 months ago to deal with general
    regulatory issues. And so I would be happy to share with you
    and bring with you NFIB's experts on that subject, if you would
    like.
        Chairman DeMint. Good. I look forward to that.
        Mr. Langer. And certainly NFIB's position is definitely
    reflected in my testimony on those issues.
        Chairman DeMint. Mr. Chairman, I don't have any additional
    questions. Thank you.
        Chairman Pence. Thank you, Chairman.
        A couple of questions. Dr. Hahn, we are told on our
    Subcommittee that the problem with our current regulatory
    structure is that agencies not only use, as you said today,
    inadequate data, but they also use bad analysis to show that
    benefits outweigh costs. And in a meeting in my office not long
    ago with someone you would have heard of in the administration,
    that was in full display, that there just seems to be bad
    information that is followed by bad analysis.
        Now, today you are saying that the Agency's own regulatory
    impact analyses, which are designed to prove their case, don't
    even pass the costs/benefit test. Is that your assertion today,
    or am I misreading your testimony and your comments?
        Mr. Hahn. I think you are reading them correctly, but I
    wouldn't call it an assertion in the sense that I think that I
    have data to support that statement.
        Let me respond to your comment a little bit more broadly.
    Now, Justice Stephen Breyer, who I consider one of the wisest
    and most intelligent people on the planet, wrote a book some
    years ago called Breaking the Vicious Circle. He was concerned
    with the fact that we had regulations--and I might not be
    getting this exactly right, but we had a Superfund regulation
    that he had to look at when he was on the Court. The essence of
    the regulation was that you had to make the dirt around a
    Superfund site clean enough so that if a kid ate it 300 days in
    the year, it wouldn't kill him by the time he was 70. And
    Justice Breyer probably scratched his head and said, well,what
    is wrong here? What is wrong with this picture? And part of what was
    wrong was fundamentally the way we structure our regulatory agencies
    today.
        Each of our agencies is given a single mission: EPA, the
    environment; NHTSA, traffic safety; and you could go down the
    list, Consumer Products Safety, and so forth.
        So, how did they further their own agenda? Well, they
    furthered their own agenda by trying to promote regulations in
    their domain. And so Justice Breyer labeled this phenomenon
    ``tunnel vision''. But a less polite way of looking at tunnel
    vision was the example you just gave, where there are
    incentives that people face in these agencies to develop
    regulations that look good when a disinterested observer like
    myself might say they don't pass a benefit/cost test.
        I have seen such biases several times when I was working at
    the Council of Economic Advisers, where I really underwent a
    rude awakening, because I thought--when I used to teach cost/
    benefit analysis at Carnegie Mellon, I used to teach and say
    these are the principles; and I came down here, and noticed all
    the fudge factors being written in, and the way benefits and
    costs were counted were not kosher, so to speak.
        It is a very real problem. OIRA, to some extent, puts some
    constraints on that process. The reason I strongly endorsed the
    Congressional Office of Regulatory Analysis or its counterpart
    at the GAO is because I think it would also serve as a
    constraint--putting agencies on notice that, if they do bad
    quality regulatory analysis, you folks are going to hear about
    it and respond accordingly.
        Chairman Pence. Thank you.
        Mr. Langer, your comments were memorable, particularly your
    reference to regulation as death by a thousand pinpricks. Good
    description.
        Mr. Langer. Thank you.
        Chairman Pence. What do you think we can do to get agencies
    to look beyond themselves, as Dr. Hahn just suggested, and see
    their regulations in a larger context, to understand that they
    are not the only agency that is regulating small business, and
    do the cost/benefit analysis in--whatever the opposite of a
    vacuum is. Many of them, as Dr. Hahn just implied, regulate as
    though they were operating in a vacuum. And how do we get on a
    practical level?
        Mr. Langer. Well, I think some of the best guidance can be
    had from the Office of Advocacy at SBA. You know, I think that
    using that office to act as a liaison, creating working groups
    between various agencies on regulations might be the best
    possible way to do it. If you get the agencies working together
    to see that their regs aren't alone, then we might be able to
    get some traction on this.
        I think also that OIRA needs to be expanded. I briefly
    touched on that in my comments. It is very clear from OIRA's
    draft report to Congress that, well, they are only starting now
    to increase their staff levels. Their staffs have been
    decreasing for some time. I think it is very clear that in
    order to make greater headway--I mean, the fact is OIRA has
    gotten roughly 1,000 comments on their draft report to
    Congress, I think a little bit more, and it is going to take
    them quite a while to wade through those in addition to
    everything else that they are doing. I think giving OIRA
    additional resources and allowing them to have additional staff
    will allow them to get a better handle on these sorts of
    regulatory problems.
        So I think with OIRA and the Office of Advocacy, the two of
    them really have to work together on this, and that is pretty
    much it.
        Chairman Pence. One last question for Mr. Arth, who I think
    wins the prize for the most eloquent statement of the day, Mr.
    Chairman, when he said, ``A lot of these just don't make
    sense.'' I thought that really summed up what we struggle with.
    And although on that side of the table is a guy who is out
    there making a company work, it may seem as though people on
    this side of the table don't appreciate that reality, but many
    of us do, and I appreciated your candor.
        A quick yes/no answer from your standpoint. Would you like
    to see the IRS subject to the Regulatory Flexibility Act? An
    awful lot of your comments related to the impact of the
    Internal Revenue Service on your business and IRS as a
    regulatory agency. Do I imply from your comments that that is a
    strong affirmative?
        Mr. Arth. Yes. You asked for a quick yes/no. I will say
    yes, absolutely.
        Chairman Pence. Let me--duly noted.
        Let me ask you a question about kind of where we started in
    the last panel. And, forgive me, Mr. Arth, I don't know if you
    were in the room when we began.
        Mr. Arth. Yes, I was.
        Chairman Pence. But Dr. Graham early on and Congressman
    McIntosh talked about anticompetitive practices. From your
    standpoint in the faucet business, is it your impression--and
    also from your position as chair of the Legislative Affairs
    Council for National Small Business United--is it your sense
    that the source of the regulatory momentum in this country is
    in Washington, D.C., or do you suspect that it comes more from
    your larger competitors?
        Mr. Arth. No. Quite frankly, I think that really the source
    is more here in Washington, D.C., but once we start down that
    path, I would say my competitors will look for opportunities to
    spin it to their advantage. And if you have a moment, I can
    give you a quick example.
        Chairman Pence. Sure.
        Mr. Arth. The 1996 safe drinking water amendments enacted
    required a new regime for chemical leaching with a heavy
    emphasis on lead leaching from brass castings into drinking
    water. The scientific basis for this whole thing is very
    questionable. I have talked to the chief engineers of Delta and
    Moen and others, and none of them are really convinced we have
    made the world any safer for our children or anyone who draws a
    glass of water out of our products, but their costs of
    compliance and my costs of compliance are virtually identical.
    I am talking probably close to a couple hundred thousand
    dollars over the last couple years for me to get lead letters,
    get product listings and all of the different things that are
    required, whether I am selling 2 million faucets a year or I am
    selling 2 million faucets a week. And so it clearly does put me
    at a competitive disadvantage just because the economies of
    scale really work to their benefit.
        It was an industry consensus standard. The faucet
    manufacturers were there, but, of course, it was the big guys
    who have the engineering staff and the depth of resources to
    staff those committees. And I won't accuse anyone of nefarious
    motivations, but I have seen firsthand how all of us complying,
    the impact is certainly very different.
        Chairman Pence. Well, let me say that is a wonderful
    stepping-off point, and maybe we could enlist Chairman DeMint,
    that our Subcommittee is currently taking a very hard look at
    the EPA lead rules and may well convene hearings in the near
    term to examine the impact of those regulations on small
    business, Mr. Arth. So you can add your name to the people that
    have encouraged us to do just that.
        Mr. Arth. Very good.
        Chairman Pence. But thank you for your candid remarks.
        And with that, Chairman DeMint, did you have any further
    questions or follow-up, closing remarks?
        I would just simply like to thank this very distinguished
    panel, Mr. Langer, Mr. Arth, and Dr. Hahn, very insightful
    remarks. And we are adjourned.
        [Whereupon, at 3:20 p.m., the joint subcommittee was
    adjourned.]
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