[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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