[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                      S. Hrg. 102-000 

  REFORMING REGULATION TO KEEP AMERICA'S SMALL BUSINESSES COMPETITIVE

=======================================================================

                                HEARING

                               before the

            SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                      WASHINGTON, DC, MAY 20, 2004

                               __________

                           Serial No. 108-66

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

                  J. Matthew Szymanski, Chief of Staff

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

            SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

EDWARD SCHROCK, Virginia, Chairman   [RANKING MEMBER IS VACANT]
ROSCOE BARTLETT, Maryland            DONNA CHRISTENSEN, Virgin Islands
SUE KELLY, New York                  ENI F. H. FALEOMAVAEGA, American 
TRENT FRANKS, Arizona                Samoa
JEB BRADLEY, New Hampshire           ANIBAL ACEVEDO-VILA, Puerto Rico
STEVE KING, Iowa                     ED CASE, Hawaii
THADDEUS McCOTTER, Michigan          DENISE MAJETTE, Georgia

              Rosario Palmieri, Senior Professional Staff

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Hayworth, Hon. J.D., U.S. Representative (AZ-5), U.S. House of 
  Representatives................................................     4
Dudley, Ms. Susan, Director of Regulatory Studies Program, 
  Mercatus Center................................................    13
Gattuso, Mr. James, Research Fellow in Regulatory Policy, The 
  Heritage Foundation............................................    15
Arch, Mr. Raymond, President, Phoenix Products...................    17

                                Appendix

Opening statements:
    Schrock, Hon. Edward L.......................................    29
Prepared statements:
    Hayworth, Hon. J.D., U.S. Representative (AZ-5), U.S. House 
      of Representatives.........................................    31
    Dudley, Ms. Susan, Director of Regulatory Studies Program, 
      Mercatus Center............................................    36
    Gattuso, Mr. James, Research Fellow in Regulatory Policy, The 
      Heritage Foundation........................................    44
    Arch, Mr. Raymond, President, Phoenix Products...............    53

                                 (iii)
      


 
  REFORMING REGULATION TO KEEP AMERICA'S SMALL BUSINESSES COMPETITIVE

                              ----------                              


                         THURSDAY, MAY 20, 2004

                  House of Representatives,
    Subcommittee on Regulatory Reform and Oversight
                                Committee on Small Business
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:41 a.m. in 
Room 311, Cannon House Office Building, Hon. Edward L. Schrock 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Schrock, King, Case and Velazquez.
    Chairman Schrock. This hearing will come to order.
    Good morning, everyone. We are having this hearing today on 
keeping America's small businesses competitive. Our economy has 
turned the corner. Small businesses, which are responsible for 
employing half of our workforce and providing 75 percent of the 
net new jobs have led the way in this recovery.
    Frankly, I think it is the job of Congress to set the right 
conditions for economic growth and then, quite frankly, get out 
of the way. Most small business men and women do not want a 
hand out or a hand up but just hands off. The United States has 
the most creative, most productive, most entrepreneurial 
citizens of any nation on this Earth. It is incumbent on the 
government to not mess things up.
    Everyone here has heard the statistics about the cost of 
regulation to our economy. And I am sure we will discuss them 
further today. Some of the numbers that just get to me though 
are the hours of paperwork burden that agencies have imposed 
upon the public. Whether it is the 149 million hours imposed by 
EPA, the 165 million hours from Labor, the 254 million hours 
from the Department of Transportation, the 276 million hours 
from HHS and the 6.5 billion hours imposed by Treasury and the 
IRS. It is just a mass diversion of our economy's productive 
resources into red tape and paperwork. And other than paper 
mills, it is not stimulating the economy.
    So today we have gathered some of the foremost experts on 
regulation to discuss possibilities for reforming the system. 
Several attempts at reform have even been made this week. On 
Tuesday we passed a series of reforms to improve the OSHA 
adjudication process which has for too long stacked the deck 
against small businesses. We also passed Representative Doug 
Ose's H.R. 2432 which will improve regulatory accounting and 
permanently authorize the Congressional Office for Regulatory 
Review inside the General Accounting Office.
    We are very lucky to have Representative J.D. Hayworth from 
Arizona with us today. J.D. has been a tireless warrior in the 
fight to fundamentally reform the system of regulation we have 
in place today. I am a co-sponsor of his legislation. And, 
Congressman, we are happy to have you here today. Creating a 
system where common sense, transparency and fairness rules the 
day in government regulations is one I look forward to. And I 
am anxious to hear the testimony of all our witnesses.
    [Chairman Schrock's statement may be found in the 
appendix.]
    We will now have any additional opening statements. And I 
would ask the Ranking Member on the full Committee Ms. 
Velazquez if she has any comments.
    Ms. Velazquez. Thank you, Mr. Chairman and welcome, Mr. 
Hayworth.
    Today the business world is getting increasingly 
competitive. It is more and more difficult for small businesses 
to maintain an edge. One reason for this is due to federal 
regulations. Unfortunately our government rules 
disproportionately weigh on our country's most important 
economic sector, small businesses. In fact, a recent report 
commissioned by the SBA Office of Advocacy showed that the 
annual regulatory burden is 60 percent higher for firms 
employing less than 20 employees than for firms with more than 
500 employees. Instead of building their businesses and 
expanding their customer base our entrepreneurs are buried 
under a mountain of paperwork.
    The Bush Administration has acknowledged just how bad the 
regulatory burden is for small business. The president has 
talked about it in several policy speeches around the country. 
He has also vowed on many occasions to do something about it. 
But the truth is this administration holds the paperwork burden 
record for the largest increase in a single year. Since the 
administration took office it has published about a quarter of 
a million densely packed pages of regulatory proposals, notices 
and rulings.
    Another big problem is the failure of federal agencies to 
comply with the law. There are laws on the books that were 
enacted to protect small businesses in the rulemaking process. 
These include the Regulatory Flexibility Act and the Small 
Business Regulatory Enforcement Fairness Act. These laws 
require federal agencies to do their homework in an attempt to 
lessen the impact their rules will have on small enterprise by 
finding less burdensome alternatives. If these laws were being 
followed the SBA Office of Advocacy would not have reported to 
Congress that its intervention saved small businesses $30 
billion in additional regulatory compliance cost.
    Clearly this shows how agencies are reluctant to fully 
comply with their requirement of RFA. This is a shame for small 
businesses and it just puts them in another one down position 
when compared to their corporate counterparts.
    There have been several proposals before this Committee on 
how we can make the regulatory environment more small business 
friendly. Even the president signed an executive order to this 
end but it did little more than restate current law. If we are 
going to make changes to the system they need to be bold ones 
that place a premium on enforcement.
    Just recently our Committee held a hearing on legislation 
that will strengthen the RFA. H.R. 2345, the Regulatory 
Flexibility Improvement Act of 2003 seeks to better define and 
expand which economic effects are to be examined by these 
agencies and requires them to use greater precision in 
performing the analysis. Most importantly, it brings the 
agencies that develop and implement regulations which weigh 
most heavily on small businesses, like the IRS, CMS and FCC, 
under SBREFA panels just like the EPA and OSHA.
    Although there is no quick fix for providing small 
businesses with regulatory relief there are proposals out there 
that could ease the regulatory burden they currently face. If 
we could strengthen the laws already on the books and ensure 
enforcement of these laws, small businesses might just spend 
less time on paperwork and more time on helping their customers 
or hiring new employees.
    With that I look forward to the testimony of the witnesses. 
Thank you, Mr. Chairman
    Chairman Schrock. Thank you, Ms. Velazquez.
    I believe the gentleman from Iowa, Mr. King, has opening 
comments. Mr. King.
    Mr. King. Thank you, Mr. Chairman. I appreciate you holding 
this hearing. And I appreciate you coming to testify, Mr. 
Hayworth.
    I would associate myself with some of the remarks made by 
Ranking Member Velazquez in that we need to make some bold 
changes. And I am one of those people that believes that there 
are foundational issues that have to do with the Constitution 
and free enterprise and law that if we get them wrong in our 
foundational portion then things grow out of them that we never 
intended, things grow out of bureaucracy that are so 
complicated that if we begin to just go in and trim the bushes 
and rearrange and grab some branches out there we will never 
get at the root cause of the problem. We have got to at it and 
chop the roots, we have got to be bold.
    And when I look back also in I have had now eight years in 
legislative life, sum total of state and federal, and I have 
seen time and time again that elected legislatures want to put 
a shield between them and accountability with the people. So we 
put a board or a commission or a bureaucrat in front of us to 
be a shield for accountability and we give those people the 
authority to make decisions. And what grows out of that? Inside 
the Beltway bureaucratic mentality where the bureaucrats that 
write the rules are looking across the table at the citizens 
who are affected by the rules but there is a disconnect because 
there is not a way that citizen can hold the bureaucrats 
accountable. And there is not really an effective way we, as 
members of this Congress, can hold the bureaucrats accountable.
    So I am very interested in H.R. 110, not because I think 
that we will amend very many rules in Committee or on the floor 
of Congress, but because we can because then that bureaucrat 
that sits behind the table will realize that the citizen who is 
affected by the rules that they are about to write has an 
alternative to come to their member of Congress and make an 
appeal whereby then the threat that we can amend the rule or 
remand it back to be written with instructions or repeal the 
rule is all part of Congress stepping up to their 
responsibility.
    This is swinging for the fences in a way. The first 150 
years of the United States that is how it was done. And it 
worked pretty well up to just before World War II. But today we 
need to get back to congressional accountability and streamline 
this regulatory process. And I think it will be streamlined 
incrementally because we will have changed the foundation and 
corrected it so that we have the right foundation.
    So I am interested in the testimony. I appreciate the 
hearing. I am looking forward to it all. Thank you very much.
    Chairman Schrock. Thank you, Mr. King.
    And speaking of bold and tearing down barriers between the 
regulators and the public that is why J.D. Hayworth is here 
today.
    J.D. Hayworth is not only passionate about this subject, 
J.D. Hayworth is passionate about everything he does up here. 
J.D. Hayworth is passionate about life. So he is probably the 
absolute perfect person to come up and speak to us. So with 
that, J.D., the floor is yours.

STATEMENT OF THE HONORABLE J.D. HAYWORTH (AZ-5), U.S. HOUSE OF 
                        REPRESENTATIVES

    Mr. Hayworth. Chairman Schrock, Ranking Member Velazquez, 
Congressman King, Congressman Case, my colleagues, thank you 
very much. And with that wonderful introduction, Mr. Chairman, 
I would ask that my entire albeit passionate statement be 
included in the record this morning.
    Chairman Schrock. Without objection so ordered.
    Mr. Hayworth. I thank the Chairman.
    Colleagues, the Constitution is clear. Article I, Section 
1, ``All legislative powers herein granted shall be vested in a 
Congress of the United States.'' And as Congressman King 
pointed out in his opening statement, for the first 150 years 
of our republic, the Supreme Court held that the transfer of 
legislative powers to another branch of government was in fact 
unconstitutional. In the late 1930s, however, the Court 
reversed itself, and upheld laws by which Congress merely 
instructed agencies to make decisions that served ``the public 
interest.'' Since then, Congress has ceded its basic 
legislative responsibility to executive agencies that craft and 
enforce regulations with the full force of law. The Supreme 
Court has not invalidated a single delegation of power since 
1935.
    Now, law-making was never intended to be in the hands of 
executive branch employees. As the Constitution enumerates, the 
power to make laws was solely vested in Congress, because 
Congress is directly accountable to the people.
    The founders knew that law-making authority vested in 
Congress would make for good government because our elected 
officials would be directly accountable to their constituents. 
I often ask those whom I am honored to serve: Do you believe 
unaccountable employees in the executive branch should have the 
power to make laws? To this day, I have not heard one person 
answer this question in the affirmative. My constituents 
understand the ramifications of granting broad powers to the 
executive branch to make laws. Yet, to the chagrin of many whom 
I serve this is the case in America today.
    It is no wonder why so many of our constituents, why so 
many citizens are so disillusioned with what they deem to be an 
unresponsive government. H.R. 110, the Congressional 
Responsibility Act, will rightly return legislative powers to 
the Congress by requiring Congress to vote on all rules and 
regulations, as defined in section 551(4) of title 5, United 
States Code, except those regulations of particular 
applicability, any interpretive rule, general statement of 
policy, or any regulation of agency organization, personnel, 
procedure, or practice. It is important to note this, my 
colleagues, Mr. Chairman, my legislation will apply only to new 
regulations and will not be retroactive.
    Now, detractors say there is no way that Congress has the 
time to review all rules and regulations that are promulgated 
by the executive branch. Regardless of time implications, 
however, it is the duty of Congress to review rules and 
regulations, as I just pointed out and was clearly enumerated 
in Article I, Section 1 of our Constitution.
    Now, I should also note that it has been my honor and 
privilege to serve on occasion as Speaker Pro Tempore of the 
House. And on more than one occasion, I have presided over 
largely ceremonial debate in which we took several hours to 
name federal installations after famous Americans, and some 
Americans quite candidly who might not be that famous. The 
question is simple and it is this: If we can name courthouses, 
airports, military bases, and other places, should we not take 
the time and do we not have enough time to vote on rules and 
regulations that profoundly affect the citizenry and the small 
businesses of this country.
    With these time constraints in mind, however, the 
Congressional Responsibility Act provides an expedited 
procedure for considering rules and regulations. Within three 
days after an agency promulgates a rule, the Majority Leader of 
both the House and Senate, by request, must introduce a bill 
comprised of the text of the proposed regulation. If the bill 
is not introduced in three days, any member thereafter may 
introduce the bill. The bill is not referred to Committee 
unless a majority of the members agree and send it through the 
normal legislative process. Within 60 days of being introduced, 
however, the legislation must come before the respective 
chamber for a vote. The bill shall be limited to one hour of 
debate and cannot be amended. If a majority of members of the 
body vote for the bill, it is sent to the other body for 
approval. Upon approval of both bodies, the legislation would 
be sent to our president to sign or veto.
    Some other opponents of this legislation might argue that 
this would delay the implementation of rules and regulations. 
In reality, I do not believe it would. Rules and regulations 
are often the subject of countless and endless lawsuits. For 
example, the final rule for leaded gasoline took nearly 10 
years to promulgate because it was the focus of intense 
litigation. Congress now becomes the final arbiter in rule 
making and the Congressional Responsibility Act states that a 
regulation contained in a bill is not an agency action for the 
purpose of judicial review under chapter 7 of title 5, United 
States Code. This would bring to a halt litigation that delays 
implementation of regulations.
    Finally, opponents of delegation say this is a backhanded 
attempt at regulatory reform. The Constitution makes clear that 
all legislative powers are vested in the Congress. Article I 
asserts that this legislative power includes the power to 
regulate. By returning the power to regulate to the Congress, 
we will make Congress accountable for federal laws. This will 
make for better government. This will make for a real reform 
and restoration. It is a laudable goal that we as well as the 
American people should desire.
    In my opinion, delegation is one of the root causes of the 
American people's disenchantment with government. We can take a 
step in the right direction by ending the unconstitutional 
delegation of powers. By taking this step, we will help restore 
confidence and integrity to the federal government. Many people 
agree with this analysis, and this is why the concept of non-
delegation is embraced by folks across the political spectrum, 
by liberals, such as Nadine Strossen of the American Civil 
Liberties Union, and conservatives, such as Judge Robert Bork. 
In fact, it was new Justice Stephen Breyer who wrote in 1984 
how the legislative veto should be replaced by an expedited 
procedure for Congress to resume its rightful role in passing 
rules and regulations.
    Congressman Bob Ney, Congresswoman Ginny Brown-Waite, and I 
have each introduced legislation, as the good Chairman and the 
gentleman from Iowa have likewise co-sponsored, that will 
provide more congressional oversight of the regulatory process. 
My bill would end delegation of legislative power to the 
executive branch. Congressman Ney and Congresswoman Brown-
Waite's legislation would set up congressional Committees 
charged with reviewing all of these regulations before they 
have the effect of law. The legislation they offer is modeled 
after the Ohio and Florida state systems respectively.
    I see these new bills, and this weeks' highlighting of the 
need for a reduction in red tape, as Congress awakening to a 
very important issue. I have heard it said that Congress only 
considers the urgent, while brushing aside the important. The 
Congressional Review Act, signed into law in 1996, seems to 
reflect that adage. Congress only considers repealing 
regulations through the disapproval resolution process if the 
matter is made urgent. Congress should examine each proposed 
rule before it goes into effect.
    Let me again pause and thank Congressman Steve King and 
Congressman Dennis Cardoza, who are co-sponsors of this bill, 
again, along with the aforementioned Chairman of this 
Subcommittee and my good friend, Ed Schrock, and so many other 
members who have helped out with the support. We have 22 other 
co-sponsors, including Congressman Paul Ryan of Wisconsin, who 
has supported this legislation since the day he came to 
Congress.
    Mr. Chairman, my colleagues, I would like to end my 
testimony by quoting John Locke's admonition that ``the 
legislative cannot transfer power of making the laws to any 
other hands.'' Delegation without representation is as wrong 
today as taxation without representation was in the 1700s. It 
is time Congress took back its constitutionally granted power 
to make laws.
    Again let me thank you, Mr. Chairman. Let me thank all the 
members of the Subcommittee for allowing me this opportunity to 
testify here today. We have talked in Congress a lot about 
reform. Reform needs to move past rhetoric to reality. I think 
that ending the delegation of powers from the legislative to 
the executive branch could be the single most important reform 
this Congress addresses. I am hopeful we can make a substantial 
change to this glaring problem in the next year.
    And again I thank you, Mr. Chairman. That concludes my 
testimony.
    [Rep. Hayworth's statement may be found in the appendix.]
    Chairman Schrock. Thank you, Congressman. You got us all 
energized now so I think we are ready to go.
    Congressman, are you at all worried that Congress might 
stifle agency attempts at deregulation by stopping them with a 
vote?
    Mr. Hayworth. No, I do not believe so. In fact, if you take 
a look--and I talked about the Supreme Court really kind of 
changing this concept in the 1930s--but take a look at the 
dynamic under which we serve right now. Let us just face it, as 
members of Congress how many times have we heard from 
constituents saying, Gee, as we are trying to work out this 
regulatory dispute we do not believe that the implementation of 
the regulation is really carrying out the will of Congress. We 
believe that the unelected are foisting their own prejudices on 
a certain rule because so often when we have dealt with a 
variety of issues we have used language that is open to 
interpretation.
    And so we are put in a situation where we will call up or 
we will write an agency and we will say, in kind of an 
unfortunate and poor impersonation of Bill Murray in 
``Caddyshack'' that seems to embody this, to show the 
frustration, we will go, Please, please, please, Mr. and Mrs. 
Unelected Regulator, wouldn't you just please, please, please 
take a second look because this is how we implemented the--this 
is how we enacted the legislation and this is how my 
constituent is trying to come back and deal with it. And yet 
you, who are unelected and unaccountable, say that it is just 
not good enough.
    Understand what we structurally have put in place, and it 
was not because of any avarice or any type of evil. Indeed, in 
the progressive era it was Theodore Roosevelt in the early 20th 
Century who said we had to bring experts into government. We 
took a look at enacting safeties for food and drugs and 
cosmetics. But we have gotten away for three-quarters of the 
20th Century and now into the 21st Century we have gotten away 
from experts helping us in terms of real science. Instead now 
the greatest growth has come in the notion of regulatory law. 
And the unelected bureaucrats, the one area of responsibility 
that is some form of merit is the promulgation of new 
regulations.
    Some of them may be needed, because we certainly need a 
modicum of regulation in a variety of industries, but many of 
them are so parenthetical and so specific and, quite frankly, 
in terms of small business so out of touch with reality, that 
we end up with the massive amount of paperwork that the ranking 
member pointed out and criticized.
    And I would say for today's purposes, mindful of the fact 
we are less than 170 days away from a general election, I will 
accept in good faith your criticism of this administration. I 
would say also that it spans other administrations. We have had 
real problems with all the rules proposed ending up in the 
federal register. And what we are doing with this legislation 
is this: we are rightfully restoring the role of Congress.
    Now, to be frank about it a lot of our brethren are 
perfectly happy with not having the responsibility. A lot of 
folks like the situation where we go and we kind of by request 
we go hat in hand to the unelected. But, see, I do not believe 
we are elected to be ombudsmen or ambassadors from our district 
to the burgeoning bureaucracy known as the executive branch and 
all the alphabet soup of administrative agencies. I believe we 
are here to be law makers. And by enacting this legislation we 
control or we take final responsibility for the promulgation of 
rules and regulations.
    Chairman Schrock. You said that in your proposal we will 
look at rules as we go forward, but what do you think we should 
do about all the unnecessary and burdensome regulations in the 
past? That is what is driving people crazy right now. How do we 
deal with that? One step at a time I gather?
    Mr. Hayworth. That is true, Mr. Chairman, colleagues. In 
fact, something that we made use of in the 104th Congress, 
which I believe is still with us in the rules of the House, 
something called Corrections Day. And perhaps we ought to take 
a look at that as we are dealing retrospectively. But for our 
purposes for reform, you know, it is inherent, even something 
as sweeping as this type of restoration of rightful powers to 
Congress has to start somewhere. And I think it is better to 
start prospectively. But I would encourage you to take a look 
as we know other bills are out there. They are already in 
practice I believe, and I do not believe we have changed the 
rules of the House. We have within our power now to bring up in 
essence Corrections Day to eliminate some red tape.
    But I think this restoration--it is really a misnomer to 
call it genuine reform--this restoration of rightful 
constitutional powers is so important and let us take it 
prospectively and we can look at a variety of other remedies to 
deal after the fact.
    Chairman Schrock. Before I yield to Ms. Velazquez, what do 
we need to do to help you move this legislation forward?
    Mr. Hayworth. Well, I would call on folks really, not even 
in a bipartisan manner but in a non-partisan manner, to take a 
look at this. I think it is important. And as I pointed out, 
folks across the political spectrum from the left to right 
understand the need to do this. Indeed, this procedure was 
outlined by now-Mr. Justice Breyer when he was talking about 
the constitutional problems that we have earlier in our history 
in the 1980s with the so-called legislative veto. He saw this 
as a constitutional way to restore the powers of article I, 
section 1.
    And it is in that spirit we come today because, again, as 
the ranking member pointed out in her comment, there are some 
legitimate concerns. Because nobody here is talking about the 
decimation of regulation. We all understand that a modicum of 
regulation is required for so many businesses, for 
environmental protections, for so many different agencies. But 
what we need to do is take back the responsibility. And that is 
what H.R. 110 will allow us to do.
    Chairman Schrock. Thank you.
    Ms. Velazquez.
    Ms. Velazquez. Thank you for your testimony on your 
legislation.
    You know, one of the characteristics of this Committee is 
that it is non-partisan compared to any other Committee. And I 
have to say that I strongly criticized the Clinton 
Administration regarding the economic impact on small 
businesses, regulations and paperwork. But there is a 
difference, the difference is that when this administration 
walked into the White House they made paperwork burden and 
regulations a top priority. The numbers does not, do not back 
that up. And that is what makes this quite amazing.
    Mr. Hayworth. Well, I thank you, Ranking Member Velazquez. 
And again, I offer, I think you offer constructive criticism. 
And we all rejoice in the fact that in less than 170 days all 
Americans will go to the polls. And I think really this is more 
not so much partisan as it is institutional. It is our role to 
be law makers. It is our job to, I believe, to reestablish what 
the Constitution says in article I, section 1.
    And so it is in that spirit I come today. And I would call 
on folks, Ranking Member Velazquez, I hope you will review the 
legislation, we would love to have you as a co-sponsor. Hope 
you can join with us in this effort.
    Thank you.
    Chairman Schrock. Mr. King.
    Mr. King. Thank you, Mr. Chairman.
    I would just point out an anecdote that I think illustrates 
some of the problem that we have. And that is some months ago I 
wrote some legislation that I was the drafter of that 
legislation, introduced it and it went into the bill, a 
separate section. I will not give you the number here in this 
hearing. That separate section addressed with a specific issue, 
specific issue that had to do with things that I was concerned 
about. The legislation passed with my text precisely the way I 
drafted it.
    But when the rules came out they did not reflect the 
legislative intent whatsoever and, in fact, it provided benefit 
to the people I was trying to bring the balance back in 
competition to. And the bureaucrats had the audacity to argue 
to my chief of staff that we did not understand the legislative 
intent. Well, there was no more definitive authority on that 
particular section of the bill than Steve King.
    And I am going to ask you to speak to that kind of issue 
but also there is a couple things. First of all, it is a non-
partisan and it is addressing an institutional, and I 
appreciate that testimony on that. I am going to ask you about 
how to address legislative intent and those kind of things, but 
also the how do we prevent as the rules are being written the 
undue influence on the amount of leadership and Committee 
chairs and ranking members on the rule writers? How do we 
counterbalance that with this legislation and how do we 
counterbalance it without that legislation?
    Mr. Hayworth. Mr. Chairman, Congressman King, I think the 
answer is implicit in the anecdote that you offered us. In 
other words, take a look at the process. Right now what you 
have is such--and I am sorry it is a strong term but I think it 
is realistic--what you have right now is a perversion of what 
our founders intended because you have the unelected, that is 
to say also the unaccountable and the unresponsive, drafting 
rules in their own image. And it is paternalism and arrogance 
of the worst variety.
    And, quite frankly, I do not believe in the construct that 
Committee chairs or other legislative leaders in any way 
influence it because what we have set up in this bill within 
the process is to bring the proposed rule and regulation word 
for word to the floor of the Congress of the United States. And 
by doing so, we are offering, we are taking a look at the fact 
that, yes, we will grant that there is certain technical, 
scientific expertise that government must call on that all 
regulation is not bad, that yes, given the sophistication and 
the complexity of what we confront now as a society we do not 
believe it would be like lightening striking twice or something 
incredibly rare but, yes, from time to time the unelected can 
have good ideas, but that we should offer our imprimatur of 
approval or disapproval of those ideas and in that--and in so 
doing be responsible to our constituents. And that way we are 
resuming and taking back the responsibility the Constitution 
gave us and we are offering accountability.
    And if there are those in the electorate who believe that 
the unelected should absolutely have that power to move forward 
or perhaps disagree with our take, then every two years we have 
the remedy likewise offered in article I of the Constitution in 
terms of the fact that we stand at the bar of public opinion 
and we can be replaced. But we will have in place, for lack of 
a better term, a forward loaded mechanism that brings 
legislation to the floor, that allows us in its purest form to 
say either yes or no to the promulgation of a regulation from 
an unelected and therefore unaccountable federal bureaucrat.
    Mr. King. Do you believe that under current structure of 
rules and legislation today that there are chairs, leaders, 
ranking members who occasionally will give a member language in 
the code but also provide license among the bureaucrats to take 
that effectiveness of that language away through the rules?
    Mr. Hayworth. I believe that our system, and I am not a 
lawyer, do not play one on T.V., but just as a citizen who 
observes history I believe that it may not have been the intent 
but in essence the practical effect of what has happened for 
the bulk of the 20th Century, now into the 21st Century, has 
turned the entire process of legislative intent and the making 
of law and then the implementation on its ear.
    And nowhere do we see it more than, as the ranking member 
pointed out, in the promulgation of all these regulations that 
show up in the Federal Register. And we need to move those 
front and center because they carry the weight of law, because 
if you violate these regulations you are subject in many cases 
to fines and/or imprisonment or sometimes both.
    It seems to me in essence these are not rules and 
regulations, they are laws. So we bring it back to the source. 
And I think this has a restorative effect that brings back the 
proper balance and I think helps strike a blow for 
accountability of the elected and for a sober reassessment of 
what has become in essence the fourth branch of government, the 
regulatory branch.
    Mr. King. Mr. Hayworth, I am in enthusiastic agreement. And 
I yield the balance of my time.
    Thank you, Mr. Chairman.
    Chairman Schrock. Mr. Case.
    Mr. Case. Thank you, Mr. Hayworth. Good to work with you.
    Mr. Hayworth. Congressman Case, thank you.
    Mr. Case. I share your sentiments and I share your 
frustration. I think I speak for a lot of small businesses out 
there. We both have experience in small business.
    I took a look at your bill very closely from that 
perspective, and came to my own conclusion that to require 
every regulation to go through Congress up front probably was 
not the way to go, just to be up front with you. But I am 
certainly looking for some way to get at the same problem that 
we both agree on. In putting your bill together did you 
consider why the current law passed in 1996 requiring 
congressional--the ability to Congress to disapprove of a rule 
or a regulation, why that is not used more by Congress, number 
one? And number two, whether there would be a way to improve 
upon that scheme which essentially gives Congress a veto right, 
I guess you could put it that way, over a regulation?
    I guess what I am looking for is a midpoint that I could 
personally accept that improves on a system that does not seem 
to be working and yet does not go as far as your bill, to be 
quite honest.
    Mr. Hayworth. Well, Congressman Case, I appreciate your 
thoughtful criticism. And let me offer this response. As one 
who came here with a new majority in 1995 and who introduced 
this I think as the first piece of legislation I have brought 
to the floor and it is reintroduced each Congress, again it is 
not a democrat or republican issue, it becomes institutional. 
It is far simpler to us--and I am not trying to indict everyone 
on the dais--but just us, Congress as congresspeople, it is far 
easier for us to go out and rant against a monolithic and 
faceless bureaucracy. And it is far easier, quite frankly, to 
be an ombudsman or an ambassador to that fourth branch of 
government rather than restore the powers the Constitution 
offers.
    And I think it is the--do not mean to get Shakespearean on 
you--but the fault, Dear Brutus, is not in the stars, it is in 
ourselves. And that is just inherent, it is just too tempting 
to sit back and just be able--and for members from both sides 
of the aisle to play the hand we are dealt now where we go in 
supplication to the unelected and say will you not please, 
please, please reexamine this?
    And to have, as one other noted thinker once said, if there 
were not a devil, man would certainly create one. And it is 
easier to demonize the bureaucracy and then to try and 
reconcile whatever problems we have on a case by case basis--
that is one of the reasons we call it case work--for so many 
small businesses, for so many constituents rather than take 
this again by the roots and restore the fundamentals of the 
Constitution and take upon our shoulders clearly and 
unashamedly and unmistakably the imprimatur the founders gave 
us.
    And, indeed, again not to make it partisan, but I have 
heard so many of my friends on the other side bemoan our 
current schedule and bemoan the naming of honorifics for 
Americans and being in the naming business for suspension bills 
so many times, it seems to me that we can make the time and, 
indeed, we should take the time for this fundamental reform. 
There have been efforts tried in the past. But until we take up 
a structural reform--this is where you and I have a legitimate 
disagreement--until we take up the structural reform it is just 
far easier to go ahead and let the unresponsiveness and the 
unaccountability of the unelected continue to proceed. It just 
happens to us.
    On another note, when I was first elected, Congressman Case 
and Mr. Chairman and my colleagues, Senator McCain called me 
and he said, Hey boy, congratulations. He said, When you get to 
Washington you are going to feel like a mosquito in a nudist 
colony.
    I said, Excuse me?
    Yeah, he said, there are so many targets of opportunity, 
there are so many problems to solve.
    And again there are some who rightly say just the sheer 
weight of this would be tough. And I appreciate that criticism 
but I think it is far better to deal with these on the front 
end because just with what we have to deal with and just the 
electoral or the political convenience, and that may not be the 
intent on either side of the aisle but it is the practical 
result. Which is why this ain't rhetoric, this is a reform that 
is a restoration that puts the Congress back front and center 
in making laws.
    But I really do appreciate your thoughtful criticism.
    Mr. Case. Thank you very much for your efforts.
    Mr. Hayworth. Thank you, sir.
    Chairman Schrock. J.D., thank you very much. I was 
fascinated by the question of Mr. Case, how do we make this all 
happen? But if we do not do something we are going to continue 
to harm small business in this country that other companies 
offshore do not have to deal with. And every regulation we pass 
just hampers them more and more and more. And we simply have to 
get that under control.
    And I think what you are doing here is trying to bring 
attention to it and, hopefully, get something done that is 
reasonable. And you are right, we can spend all day Tuesdays 
naming bridges, highways or whatever else. And to me that is 
okay but I think this is far more important to the vitality of 
business in this country. We have got to get this under 
control.
    Mr. Hayworth. Well, Mr. Chairman, I thank you. And again, 
just to say to my colleagues if we are able to move forward 
with this, again embraced by members on both sides of the 
aisle, in fact outlined by now Mr. Justice Breyer in some of 
his writings, this is not a republican/democrat conundrum, this 
is a structural reform that is not a ruse, it is a restoration 
of the legitimate function of the legislative branch. And we 
ignore it at the peril of our country, the peril of small 
business and the ultimate peril of our citizenry. And I thank 
you very much.
    Chairman Schrock. Thank you. Thank you for your patience 
and thank you for coming.
    My 90, almost 91-year-old father thinks J.D. Hayworth was 
sent straight from heaven and is the finest congressman that he 
has ever seen. Not me but J.D. Hayworth. And he would be 
delighted to know that I spent time with you today. And we 
really appreciate you coming.
    Mr. Hayworth. Mr. Chairman, thank you for that praise. I 
think you would get a few arguments both theologically and 
practically from other folks. But I appreciate your father's 
support and I appreciate the wonderful reception of the 
thoughtful criticism and the thoughtful plaudits for this 
legislation. And I hope we can move forward.
    Chairman Schrock. Thank you very much.
    Mr. Hayworth. Thank you.
    Chairman Schrock. We will take about a four minute break 
while we set up for the next panel. Thank you very much.
    [Recess.]
    Chairman Schrock. Well, thank you all for being here. I 
feel sorry for the three of you that have to follow J.D. 
Hayworth. That is one tough act to follow. But he is really 
passionate about what he does. And I am glad you were here to 
hear him speak.
    Before we begin testimony from these witnesses I would like 
to remind everyone that we would like each witness to keep 
their oral statements about five minutes. In front of you on 
the table you will see a box that will let you know when your 
time is up. When the light is yellow that means you have one 
minute remaining. When it turns red at the five minute point 
the trap door opens and away you go. Once the red light the 
Committee would like you to wrap up as soon as you can.
    We are going to hear next from Susan Dudley. Ms. Dudley is 
the Director of Regulatory Studies Program at the Mercatus 
Center at George Mason University out in Fairfax County, 
Virginia. Additionally she is an adjunct professor at both 
George Mason University School of Law and Georgetown 
University. Ms. Dudley previously worked for the Environmental 
Protection Agency and the Office of Management and Budget in 
addition to positions within the Department of Energy. And she 
has written numerous articles on issues of regulation.
    So we are delighted to have you today. And with that I turn 
the floor over to you.

           STATEMENT OF SUSAN DUDLEY, MERCATUS CENTER

    Ms. Dudley. Thank you, Chairman Schrock, Congressman King 
and Congressman Case. Thank you for inviting me to testify on 
this important issue of reforming regulations to keep America's 
small business competitive. My testimony reflects my own views 
today and not that of either university that I am affiliated 
with.
    I appreciate your efforts this week to highlight the 
impacts of federal regulation. And I thought your opening 
statements were inspiring and right on point. Our research at 
the Mercatus Center supports your concern that regulatory 
activity and the burdens that activity imposes on small 
business is growing.
    Our detailed survey of 100 U.S. manufacturers suggests that 
the average manufacturer spends roughly $1,700 per employee to 
comply with workplace regulations alone. For small 
manufacturers, those employing less than 100 workers, costs are 
about $2,500 per employee, that is 68 percent higher than the 
cost per employee for firms with 500 or more workers.
    So understanding the impact of federal regulation is the 
first step in reforming it. With that in mind I have three 
recommendations for regulatory reform.
    My first recommendation is to explore ways to treat 
regulatory expenditures in a manner similar to on-budget 
expenditures. For federal spending to be dedicated, Congress 
must first authorize an activity, and then appropriate the 
necessary resources. Regulatory spending, the cost that 
consumers, workers, and employers pay to comply with regulatory 
requirements, on the other hand, is authorized in statute, 
often in broad terms, with little follow-on action.
    Recognizing that regulations, like on-budget federal 
programs funded by taxes, divert private resources to broader 
national goals, Congress could consider treating regulatory 
expenditures more like on-budget expenditures. By adding the 
appropriations function that is missing from the current 
process, it could make implicit expectations of costs and 
benefits more explicit and provide much needed guidance to 
executive branch agencies to whom responsibility for 
promulgating regulations are delegated.
    My second recommendation is that agencies condut--should 
conduct ex post analyses of the costs and benefits of 
regulations. After a regulation is in place, Congress and 
executive agencies should follow through to ensure that its 
intended impacts, both the benefits and the costs, are being 
achieved.
    Executive Order 12866, SBREFA, and individual statutes 
require agencies to conduct benefit-cost analyses of 
significant regulations as they are being developed, but these 
ex ante predictions of the impacts of regulations are not 
always accurate. One way to improve our estimates of the real 
impacts of regulations would be to encourage more ex post 
assessments based on actual experience. When they have been 
undertaken in the past, these ex post assessments have proved 
illuminating.
    Making retrospective analysis of the impact of regulations 
a standard practice rather than an exceptional exercise would 
inform the policy debate in beneficial ways. Policy makers 
would have information with which to eliminate or modify 
ineffective rules, expand more effective rules, and design 
future regulations that meet the needs of American citizens.
    My final recommendation is for a legislative branch review 
body which could provide a more independent assessment of the 
regulatory costs and benefits.
    It is not clear that the Office of Information and 
Regulatory Affairs, from its location in the executive branch, 
is in a position to provide the necessary check or independent 
assessment of costs and benefits. OMB should continue to 
enforce the principles of Executive Order 12866 and hold 
agencies accountable for ensuring proposed regulations do more 
good than harm. Americans may also benefit from a legislative 
oversight body. Indeed, Congress has authorized a Congressional 
Office of Regulatory Analysis to be housed in the General 
Accounting Office, but it has not been funded. Such a body 
could provide Congress and U.S. citizens with an independent 
assessment of the total costs and benefits of regulation, and 
also help ensure that statutes are being implemented so the 
benefits to Americans outweigh the costs.
    In conclusion, over 60 executive branch departments, 
agencies and commission employ over 190,000 people to write and 
enforce thousands of new regulations every year. It is 
important for the legislative branch to monitor this activity 
and set constraints. I truly appreciate this Subcommittee's 
recognition of this and its efforts to keep regulators 
accountable.
    Thank you.
    [Ms. Dudley's statement may be found in the appendix.]
    Chairman Schrock. Thank you, Ms. Dudley. A hundred and 
ninety thousand people. That is bigger than 90 percent of the 
cities in this country, is it not?
    Our next witness this morning is James L. Gattuso who is a 
Research Fellow in Regulatory Policy at The Heritage 
Foundation. He has previously served as the Vice President for 
Policy at the Competitive Enterprise Institute. His service 
also includes time at the Federal Communications Commission and 
the first Bush administration as Associate Director of the 
President's Council on Competitiveness.
    And we are delighted to have you today and are anxious to 
hear what you have to say.

      STATEMENT OF JAMES GATTUSO, THE HERITAGE FOUNDATION

    Mr. Gattuso. Chairman Schrock and members of the 
Subcommittee, thank you for inviting me today to testify on 
this important issue. First let me say the views expressed by 
me today are my own and do not reflect an institutional 
position of The Heritage Foundation or its board of directors.
    Regulation is an overlooked issue, it is a hidden tax on 
Americans. It is unlike federal income taxes, there is no 
bottom line, no April 15 when the costs of regulation are paid 
but, as you know, they are real and substantial. I will not go 
over the numbers today. You know them. Here is the headline 
numbers; $843 billion in costs as reported by a study performed 
for the Small Business Administration. Let me say that I think 
even that number may be understated.
    I have spent a lot of time, for instance, in the regulatory 
field involving high technology and innovative industries. And 
when you have regulation that constrains innovation, that 
constrains competition that leads to innovation, the costs are 
almost immeasurable. You know that you are losing something but 
you do not know what has not been invented.
    To its credit I think the Bush Administration has 
recognized the problem of regulation and has taken several 
steps to try and slow the growth of regulation, revitalizing 
the Office of Information and Regulatory Affairs, and giving 
more authority to the Office of Advocacy at the Small Business 
Administration. And this has led to some successes. But while I 
think the growth of regulation has slowed somewhat, burdens are 
still growing, not shrinking. We are not winning this battle.
    For instance, the 2003 addition of the Code of Federal 
Regulations weighed in at a whopping 144,177 pages, about 1,000 
pages less than 2002, the record year, but still 4 percent more 
than when President Bush took office in 2000.
    Similarly, the number of federal rule making procedures--
proceedings which increased burdens on the private sector still 
substantially outnumbered those which decreased burdens. 
According to General Accounting Office numbers, the database 
under the Congressional Review Act of all major regulations, if 
you look at regulations excluding those that are budgetary in 
nature, excluding those that do not clearly increase or 
decrease burdens on the private sector, there have been 30 
major final rule makings under those criteria from the start of 
the Bush Administration to the end of 2003. Of these, 21, or 70 
percent, increased regulations rather than decreased them.
    Now, that is a little bit better than the record under the 
Clinton Administration where about 75 percent increased 
regulation.
    These numbers, by the way, get higher if you exclude 
actions by independent agencies. The Clinton record was over 90 
percent of rule makings increasing regulation if you look at 
their executive branch actions. Bush's, President Bush's 
executive branch actions increased burdens 74 percent of the 
time. So clearly regulation is expanding, not shrinking.
    What can be done to curb unnecessary regulation? There are 
several proposals pending in Congress that represent steps in 
the right direction. I generally agree with the direction taken 
by H.R. 2345 and H.R. 2432. However, I do not think that they 
will totally solve the problem. In addition to a requirement, 
for instance, that agencies put more analysis into their 
regulations that they perform, more cost/benefit analysis, more 
regulatory flexibility analysis, we need to make those analyses 
independent and make sure that the effect of regulation is 
considered at every level of the debate, not just in a separate 
analysis done after the real decision has been made.
    So let me suggest some reform proposals that would help 
move us in the right direction in addition to these two bills.
    First, establishment of an independent Office of Regulatory 
Analysis. Congress is taking now a small step in that 
direction. I think much more needs to be done. Congress needs 
an independent source of analysis on regulations similar to the 
Congressional Budget Office.
    Second, we should establish regulatory review offices, or 
mini-OIRAs, inside each agency. Regulatory review, 
consideration of regulatory costs, should not be begun once the 
regulation has left the agency, it should occur internally. I 
would have these mini-OIRAs somewhat independent from the 
agency itself, as a separate organizational unit, but involved 
in the regulatory process from the beginning as part of the 
agency.
    Thirdly, we should designate regulatory reform `czars` at 
each agency. There is no better way to ensure that an issue or 
a set of factors are considered than to make sure that someone 
in the bureaucracy has it as their focus. Make it part of their 
job description. They will not always win their internal 
battles but they will be there to make sure that the problems 
of regulation, that the costs of regulation are considered.
    Fourthly, require independent agencies to submit analyses 
to OMB. A large portion, about one-third of the regulations, 
major regulations promulgated last year were by independent 
agencies. And those underwent no independent review whatsoever. 
A large number of those underwent no cost/benefit analysis even 
by the agencies that promulgated them.
    If placing independent agencies completely under the 
executive branch review process is infeasible at this time, I 
think we should, Congress should at least require those 
agencies to prepare regulatory analyses of planned significant 
rules, and forward those analyses to OIRA for non-binding 
review as a first step.
    And fifthly, I do think that Congressman Hayworth is 
correct that we need to have congressional approval of rules. 
Under the Congressional Review Act, Congress has the ability to 
veto new regulations but that authority has only been used 
once. Our system of government requires that Congress take 
responsibility for new rules imposed on society. Congressional 
review and approval of major new burdens should be required.
    Thank you very much.
    [Mr. Gattuso's statement may be found in the appendix.]
    Chairman Schrock. Thank you. It is just developing the will 
up here to make that happen. And sometimes that is the most 
difficult thing.
    Thank you very much.
    Our last witness this morning is from the state of my 
birth, Ohio. And he is Raymond Arth who is a small business 
owner from Avon Lake, Ohio. He is the President of Phoenix 
Products, a Cleveland-based faucet maker.
    We are getting ready to rebuild our house. Maybe I need to 
come see you, hey?
    Mr. Arth. We can talk.
    Chairman Schrock. You can talk.
    Mr. Arth also serves as the Chair of the National Small 
Business Association's Board of Trustees. And we are delighted 
to have you today and anxious to hear your testimony.

          STATEMENT OF RAYMOND ARTH, PHOENIX PRODUCTS

    Mr. Arth. Thank you very much, Chairman, Schrock and 
Congressman King, Congressman Case. I appreciate the 
opportunity to be here today and I also want to thank you for 
taking the time to participate in person.
    As you mentioned, I am Chairman of NSBA. And we just 
concluded our annual Washington gathering for small business 
owners around the country to come here, meet with the members 
of Congress, the administration and go and lobby our elected 
officials. It is clear to me after three days in Washington 
that Congress knows everything in my testimony and the 
testimony of the people who came before me. Virtually all of it 
came out of the mouths of the people who presented to us over 
the last couple days. So I am not going to presume to tell you 
anything that you do not know or waste a lot of time repeating 
what is in my testimony.
    This week, as evidence of the fact that Congress is aware 
of this, you passed a handful of OSHA reform bills that we have 
lobbied to see passed. We appreciate the fact that they have 
moved through the House. And we hope you can bring some 
pressure on the Senate to see action over there as well.
    Chairman Schrock. Good luck.
    Mr. Arth. All I can do is write letters. You folks have a 
little more access perhaps than I do.
    So I guess I would like to share some personal thoughts 
that maybe can at least bring something new to the table that 
you are not already familiar with. The first one is the real 
economic impact that regulations have.
    My company for its entire history, for over 25 years we 
have faced foreign competition, most of it from Asia. And for 
25 years we were very successful in meeting that competition 
time and again, finding ways to continue to offer a value 
proposition that made sense to our customers and to win more 
often than we lost. I think that we have seen some fundamental 
changes in the economic environment in which the United--that 
the United States' position in the world has changed 
fundamentally and that we are at a point today where I am 
losing more often than I am winning.
    I think we are at a point today where the excessive 
regulation that we could afford in the past because of the 
unique position we had in the global economy is gone and that 
we need to start to really consider the costs of regulation and 
accept the fact that everything has been regulated several 
times and we can continue to regulate it. But at some point 
people have to understand that the trade-off is diminished 
economic performance and a decrease in the economic standard of 
living of Americans if we want to continue down this path.
    We have to admit that fact. We have to educate the American 
public to that fact.
    I also cannot emphasize enough that small businesses are 
not just miniature big businesses. Enron Corporation is a C 
corporation that had a 401(k) plan. Phoenix Products is a C 
corporation that has a 401(k) plan. They did some things that 
caused some problems that resulted in all sorts of legislation 
which will generate all sorts of regulation. Two C 
corporations, two 401(k) plans, we will both be treated 
essentially the same. But when you treat my company the same 
way you treat a global organization you end up with 
inappropriate and unreasonable regulations. What it becomes is 
overkill.
    And ``kill'' is the operative word in there because at some 
point the costs--I have two choices, I either do not comply and 
run the risks of getting caught, or I bear the burden of 
complying which eventually becomes so costly that my 401(k) 
plan goes away because it is no longer worth the effort.
    As legislation goes forward, as regulations are promulgated 
there has to be more consideration given to the legitimate 
differences between large businesses and small. And to give you 
one more quick example of that there was a company in Cleveland 
I am somewhat familiar with that recently was caught because of 
some irregularities with their pension plan, all of this years 
after the previously-mentioned Enron situation. It has been 
litigated. The individual is currently in bankruptcy where he 
belongs. The assets that could be recovered have been recovered 
and restored to the fund. And I think the criminal charges are 
moving along at appropriate pace. He is not holed up somewhere 
in an estate while underlings are going before the mill.
    In legislation I think there is an awful lot of too much of 
the how and not enough of the what. I did not realize it at the 
time but that statement that it depends on what your definition 
of ``is'' is, is as much as comment about the statement of our 
legal environment today as it is about the character of an 
individual. It seems as though no matter how carefully a 
regulation is crafted, no matter how smart the people are who 
draw it up there is always going to be someone out in the real 
world who is just a little craftier who is going to find that 
tiny little loophole that they can steer through which will 
create a whole new round of regulation, which is going to have 
a whole new bunch of loopholes.
    Let us focus more on what the goals are and a little less 
on telling me exactly how I can make my punch press safe. I 
want to keep all my fingers, thank you very much. Trust me, I 
know how to do it as well or better than most of the people who 
actually write the regulations.
    So I guess I will finish where I started. Congress knows, 
you have known since 1980 when the Paperwork Reduction Act was 
passed, and 25 years later paperwork it certainly has not gone 
down, and I shudder to think where it would be without it. We 
did SBREFA in 1996 and it is still pretty much a toothless tool 
that is not having the impact that all of us had hoped.
    I think it is time that Congress turn that knowledge into 
action, not more legislation, but putting some teeth into those 
that already exist.
    Thank you very much.
    [Mr. Arth's statement may be found in the appendix.]
    Chairman Schrock. Thank you very much, Mr. Arth. You make 
some incredibly good points on things we need to listen to up 
here.
    Ms. Dudley, your testimony cites how many regulatory 
initiatives are funded in perpetuity without regard to their 
effectiveness. What kind of impact would a more extensive 
analysis of the effect of this, of each regulation do and what 
would actually be able to make a factual case that a regulation 
is not doing anything?
    Ms. Dudley. Well, that is a good question. And I think we 
have not done enough retrospective analyses to know what they 
might show. In my written testimony I have an interesting story 
about Highway Safety Administration, the high-mounted brake 
lights on our cars, and how very careful benefit/cost analysis 
beforehand showed that the benefits in terms of accident 
reduction would be huge from that.
    After the fact, after the brake lights were on everybody's 
cars they did a retrospective ex post look and found that, 
indeed, the accident reduction was one-seventh of what they 
predicted. Why? Because when you can see the brake light high 
you can drive closer to the car in front of you so you collide, 
you collide anyway.
    So you do not catch these behavioral, the best cost/benefit 
analysis in the world cannot really capture some of these 
behavioral impacts of regulations.
    So I think doing some more case studies would be a first 
start. But I think requiring it as a standard rule would be an 
excellent thing to do.
    Chairman Schrock. Yes. They are putting sensors on front 
bumpers now, did you notice that, and back? I have it on the 
back and believe me it has saved me lots. And I wonder what 
putting them on the front is going to do. It is going to be 
interesting to see if that is really going to pay off.
    Ms. Dudley. So it gives you an alarm, it that what a sensor 
does?
    Chairman Schrock. Yes. So it could get you close to that 
light you know. Amazing.
    Mr. Gattuso, you referred to hindered innovation being the 
primary cost of regulation. And how does this affect the future 
of the U.S. economy?
    Mr. Gattuso. You think I would have remembered that.
    In today's economy we are more and more dependent upon 
innovations, upon change, upon inventions than ever before. The 
percentage of the economy that is information based is I 
believe a majority of the economy right now. I cannot say for 
sure. But it is clearly the driving force of the economy today 
and of the world economy.
    It is no longer a situation where you can just look at a 
burden in terms of paperwork or a burden in terms of the cost 
to buy something. You have to look at these unknowables. It is 
just essential.
    Chairman Schrock. Stifling innovative thinking obviously.
    Mr. Gattuso. That is right. And the worst part about it I 
think is that we will never know what is lost.
    Chairman Schrock. That is right.
    Mr. Gattuso. We could do all sorts of studies.
    Chairman Schrock. If you do not have something you cannot 
appreciate what you do not have.
    Mr. Gattuso. Exactly.
    Chairman Schrock. Yes.
    Mr. Arth, as a small business owner what do you feel is 
your greatest loss due to excessive regulations? And did this 
affect your ability to grow your business?
    Mr. Arth. My greatest loss due to regulation?
    Chairman Schrock. Yes. What part of your business has been 
severely hampered by the regulation you are forced to live 
under?
    Mr. Arth. I think typically the first thing that small 
businesses will point to are all the costs, the compliance 
costs imposed by the Internal Revenue Service and Treasury 
Department, predictably.
    You have to keep in mind that our best and brightest are 
the ones who are devoting their time and energy to making sure 
that all the filings are done on time. The money we spend to 
hire the best and brightest they are not working on new 
products, new marketing programs, on identifying customer 
needs, they are working on making sure that our eight monthly 
payroll deposits are being made on time, that 941s are filed on 
a timely basis. So, clearly, the time and money and energy that 
has been devoted to all of that.
    And I will remind you the payroll tax issue in particular, 
you know, during down periods of time payroll taxes, the FICA 
and medicare tax is a tax on employees and so it discourages 
hiring. I may be losing money but I am still contributing that 
half of the FICA and medicare tax. I never asked to become the 
collection agent for the federal Treasury and I am not 
compensated to do so. But should I be a day late in making one 
of those eight monthly deposit periods the IRS is not going to 
cut us much slack in imposing penalties and so forth.
    So I cannot point to a thing, as was just said, it is the 
things that we did not develop or deliver because of the money 
and energy that we had to devote just to running the business 
legally and ethically to comply with all those regulations that 
exist that has been my biggest cost.
    Chairman Schrock. Okay. For the three of you, what is the 
one thing that we up here could do for you this year that would 
help get the regulators under control?
    Mr. Gattuso. We only have one?
    Chairman Schrock. Well, if there is more hit us with them.
    Mr. Gattuso. I think as important as I think that 
Congressman Hayworth's proposal is, and I think that is a 
critical reform to get congressional review, in terms of things 
that can be done this year I think that establishing review 
offices in each agency, establishing regulatory czars are ideas 
that can be done immediately. And I cannot see those as being 
too controversial but can have a real practical effect.
    And next to that, establishment of a funded congressional 
review office that will provide real analysis and independent 
analysis of regulations.
    Chairman Schrock. Ms. Dudley?
    Ms. Dudley. Yeah, let me second that one because you have 
got--you have authorized this office. And funding it would give 
you the independent analysis that I think that you need. So 
that would be a quick step.
    And then the other one would be when new statutes are 
written they should have a budgetary component. You should say 
this is how much we think it will cost. We have these goals for 
what this legislation will do and this is our expectation of 
how much it will cost.
    Chairman Schrock. Economic impact on each regulation.
    Ms. Dudley. Uh-huh.
    Chairman Schrock. Mr. Arth?
    Mr. Arth. Well, I do not see much prospect of getting a law 
passed that would require members of Congress and the Senate to 
go back into the real world every few years and actually try to 
comply with all the regulations they have created. So I have 
got to say that as an organization we have been a strong 
advocate in favor of the cost/benefit analysis and regulatory 
review.
    Chairman Schrock. That is a wonderful statement by the way.
    Mr. Case.
    Mr. Case. Ms. Dudley and Mr. Gattuso, I just have to agree 
with Mr. Arth that Congress knows what the problem is but does 
not know what to do about it. We struggled with this in Hawaii 
and many other states have struggled with this over a long 
period of time. We thought about every single idea that has 
been proposed. We implemented some of them, some successfully, 
some not so successfully.
    We thought about a legislative veto. We thought about the 
state equivalent of Mr. Hayworth's bill. We thought about the 
czar, the ombudsman, the cost/benefit ratio, regulations 
applicable only to certain employees, over 20 employees, you 
know, certain companies over 20, every single thing under the 
book. I do not think we came up with a better answer or worse 
answer than any other state.
    But it does strike me that the answer to this, how to get 
it done, having identified the problem pretty specifically, 
lies in part on the states. Are there states out there in your 
mind, to your knowledge that are doing a really good job in 
this area that have an outline that could work for us in the 
federal government?
    Ms. Dudley. I will give you a quick two-part answer and 
then I would love to do some more research and follow up on 
that question because I think it is a good one.
    The first part of the answer is that a large portion of the 
regulatory burden at the state level is federal regulations. So 
often, so that may be part of the answer that it is hard for a 
state. They can constrain maybe 10 percent or take control of 
maybe 10 percent of the regulatory activity but most of it 
comes straight from the federal government.
    I know several states have got programs in place, including 
Virginia. I think Pennsylvania does. But I would love to offer 
to follow up on that and do some research on it and get back to 
you because I think it is a very interesting question.
    Mr. Case. Mr. Chair, I would ask consent for the 
Subcommittee to entertain that when it comes in.
    Chairman Schrock. Without objection. That is a great idea.
    Mr. Case. Mr. Gattuso?
    Mr. Gattuso. If I may add, I think it is worth following up 
and providing specific information for you. I am aware that 
Colorado has a very active regulatory review and analysis of 
efforts going on, initiative. They have done a number of things 
to focus efforts, to increase reviews of regulation.
    I do not know quantitatively what the outcomes have been 
yet. I believe this is a relatively new effort over the last 
couple of years. But that is one state to look at. And I also 
would like to follow up on that.
    Mr. Case. Thank you.
    Switching back again, I am picking up on Mr. Arth here 
because he is the guy that lives in the real world, I was 
especially struck by his observation that small business is not 
big business in this area. And, frankly, when I took a look at 
the title of this hearing, how to make small business 
competitive, I was wondering whether we were talking about 
small business versus foreign companies or small business 
versus big business, because it is not a direct proportional 
relationship.
    And we have similarly thought and even implemented in 
federal law from time to time distinctions between ``small 
business'' and ``big business'' in the regulatory scheme. But 
it always seemed to lead back to subversion really by non-small 
businesses to get themselves in under the box. We have seen, 
for example, on this Committee how non-small businesses have 
become small businesses for federal preference contracting. I 
have certainly seen it in my state where the Prepaid Healthcare 
Act applies to the employees or companies with employees of 20 
hours or more per week. And all of a sudden you have a lot of 
19 hour employees.
    Is there in your view an effective way to distinguish 
between small businesses and larger businesses for the purposes 
of equalizing, if we can put it that way, the regulatory burden 
where you would in fact say to small businesses we are not 
going to ask as much of you? Because the consequence of going 
in that direction is that all of a sudden everybody tries to 
become a small business to drive through the loophole that Mr. 
Arth just noted. Because everybody wants to drive a loophole 
somewhere.
    Is there anything that works from that perspective to--or 
is the answer, as I suspect it is, simply to reduce the burdens 
for everybody and let it, you know, take its proportional 
effect on small businesses?
    Ms. Dudley. And I think all the points you have made are 
right. When you have a cutoff not only do you find people 
trying to cheat to get in the cutoff but you also prevent small 
businesses from growing. So someone who is innovative and has 
some good ideas cannot grow because then suddenly they will get 
whopped with the full burden. So it is difficult.
    I think one of the things that happens in Washington, and I 
think your Committee is a counterweight to it, and people like 
Mr. Arth are a counterweight, is that the large companies--and 
everybody when it comes to regulation is trying to shift the 
burden to someone else. Large businesses they are very happy to 
take on some big regulations--I mean you, Chairman, you were 
talking about innovation. The innovators in pharmaceuticals and 
agricultural chemicals, large, large companies are more than 
happy to have difficult regulatory requirements because then 
when a small one comes up with a great innovation it has to get 
bought up by the large company in order to actually pursue it.
    I guess I am agreeing with your problem but I am not sure I 
have got a good response. But James does.
    Mr. Gattuso. Thank you. Hand it over to me.
    No, I am also I am skeptical about whether that can be done 
in a way that does not distort the economy, as Susan said, 
keeping people so that they can get in the system, maybe 
discouraging them from growing. Which I do not know whether it 
can be done.
    I am also doubtful that it is something that should be 
done. I think it is important to remember that big businesses 
two or medium size businesses, businesses of any size are hurt 
by regulations and their consumers are hurt when those 
businesses are over-regulated. Excessive regulation on a Target 
or a Wal-Mart or a Southwest Airlines or United Parcel Service 
hurts consumers as much as excessive regulations on small 
businesses. So we have to keep ultimately the consumer in mind.
    And also it is important to remember that regulations on 
larger businesses also come back and hurt small businesses. For 
instance, in the telecommunications field excessive regulations 
on telecommunications providers can keep new innovations or 
keep prices high for existing communications systems that are 
required and needed by small businesses.
    So I would support keeping the focus on reducing regulation 
across the board without trying to segment the market.
    Mr. Case. Well, I will just conclude by observing what Mr. 
Arth is thinking here, which is that what hurts a big business 
drives a small business out of business. And that is the 
dilemma that we have.
    Thank you.
    Chairman Schrock. Mr. Case talked about agonizing over 
these regulations. And every state goes through it. But I guess 
if you have to agonize, Hawaii is not a bad place to agonize.
    Mr. Case. Right.
    Chairman Schrock. Mr. King?
    Mr. King. Thank you, Mr. Chairman.
    As I sit here and listen to this testimony--and I 
appreciate the testimony of every one of you--I am particularly 
interested in Mr. Arth's because you are living under these 
regulations. And a little thing comes to mind that some years 
ago I remember a mentor of mine that told me when he was young 
he learned early on that if you are going to have anything to 
do with interest he wanted to be the one collecting it rather 
than the one paying it.
    And it occurs to me if you are going to have anything to do 
with regulation you want to be the one that is writing and 
enforcing rather than the one that is complying. And 
particularly for me because the 31st of this month I marked the 
one year anniversary of my significant freedom from complying 
with regulations because I sold my 28-year business to my 
oldest son who now has that burden and who lobbies me 
continually about the load that you described here today.
    There is so much that I would say about this. And but about 
1991 or 1992, shortly after the Berlin Wall came down and the 
Soviet Union was breaking up and then reformed, somewhere in 
there I held a meeting in my office, my construction office in 
Odebolt, Iowa. I had 15 contractors from around the Midwest and 
Nebraska, Iowa, Illinois mostly. As they sat there around that 
table we discussed our business issues. And in the end I asked 
for a summary, what is the biggest problem that you have, the 
biggest difficulty you have in business?
    They all said it a different way but after all 15 had had 
their say they came down to one word: regulation. And that is 
what we are against. There are 43 different agencies that 
regulate my King Construction. And I would ask this question, 
and it is only going to be rhetorical because I would not put 
anybody on the spot: if someone wants to volunteer and say they 
own and operate a business, particularly a small business, can 
make the allegation that they are in compliance with all the 
regulations out there out of those 43 agencies that would be a 
most foolish thing to do. The bureaucrats would find you and 
prove to you that it was an outrageously erroneous statement.
    When we have that kind of a regulatory structure in this 
country it is time to move and change this. So I have got two 
big pieces here that I would like to address. And I am going to 
address them both to Mr. Arth. And hopefully I have got time.
    But litigation and insurance, could we in your opinion 
dramatically reduce and eliminate regulations, both federal and 
state regulations where we could, and rely more on, I mean 3 
percent of our GDP is consumed by the trial lawyers today 
anyway, can we not rely on that deterrent and could we not rely 
on the cost of insurance premiums that have far less federal 
regulation and have more productivity, Mr. Arth?
    Mr. Arth. Congressman King, I think if I understand the 
question moving more to a civil action model as opposed to a 
government enforcement model, it may well work. The insurance 
piece may not fully apply because to the extent that it would 
constitute an intentional act, intentional tort, insurance 
benefits typically will not pay damages.
    But, quite frankly, I sometimes feel that the regulatory 
structure actually gives people a wall to hide behind. When 
they are--when they have found that loophole they can get 
through it and after the fact say, but I complied with all the 
regulations.
    I am often surprised when we have an event like some of the 
financial scandals that we have had over the last few years 
that it results in a flurry of new legislation. Because what 
was done, in my mind as I understood the law, and I practiced 
for a brief period of time as a CPA, was already illegal. So 
why are we passing yet a new round of laws when theoretic--I 
cannot imagine there are that many huge holes in the laws that 
exist today that many of the things that spur new legislation 
could not already be passed under what exist--or I mean could 
not already be punished under the laws that already exist, if 
that makes sense.
    If I could, and I am sorry that Congressman Case had to 
leave, as we were talking about solutions I was reminded of 
something that almost might apply in this case. I ran across a 
theory in human relations management called the manage the 
worst trap which basically says that we all make a mistake with 
our employees because you have got a certain group that are 
always going to work very hard no matter what you do to them, a 
large group that will always work based on the rewards and 
penalties in place, and then that small group that no matter 
what you do they are always going to be scoundrels.
    Those people, that little group of troublesome employees 
are the ones we write our handbooks for. So we discourage the 
big group who want to do things right in the first place and we 
put barriers in the way of that other group who are always 
going to behave appropriately no matter what you do and we come 
up with all these rules and regulations to try to outsmart the 
bad guys.
    I think at some point we just have to admit there are 
always going to be bad guys, we should have laws broad enough 
that bad behavior like that is clearly punished, and quit 
trying to manage the worst through legislation and regulation.
    Mr. King. Thank you. Mr. Chairman, I ask unanimous consent 
for a few more minutes?
    Chairman Schrock. Please.
    Mr. King. Thank you.
    I would like to offer an opportunity to comment to each of 
the other witnesses on that question. Then I have another 
question I would like to raise. If you would want to address 
the subject matter of whether we could move more to a civil 
model and less of an enforcement model and what you might think 
of the protection or the shield that current regulations might 
provide for people? Mr. Gattuso?
    Mr. Gattuso. Just very briefly. I think as a general matter 
I prefer common law solutions, solutions in court rather than 
regulatory solutions. They are more flexible. When done 
properly they become better solutions than a one-size-fits-all 
regulation.
    That is a very big caveat though because I do not think we 
have a well-functioning tort system right now. So I would 
hesitate to throw the solutions into the court system, the tort 
system as it now exists. So even though the common law is in 
theory a better alternative I do not think we have that court 
system working well enough to serve that role.
    Mr. King. I hope to be at that hearing too.
    Ms. Dudley?
    Ms. Dudley. I would agree that before we had the regulatory 
state that we have now we had a common law system that was much 
better at adapting to the circumstances of the individual 
cases. If somebody spilled waste in my yard I could take them 
to court and they would have to clean it up. Now if somebody 
spilled waste in my yard it is okay as long as it meets the 
standards that EPA has set. And I think a common law system 
would be better.
    Mr. King. Thank you.
    And then returning to Mr. Arth, another thing that you said 
interested me significantly and that was that the heaviest 
regulatory burden that you have to comply with is the IRS and 
payroll withholding taxes and being a collecting agent for the 
federal government, an uncompensated collecting agent for the 
federal government.
    And I am one of a growing number of members of this 
Congress who believes that we need to eliminate the internal 
revenue code, the Internal Revenue Service, untax our 
businesses since they are collectors of taxes, not taxpayers, 
and free this country up and move to a consumption tax on sales 
and service. The structure exists today in 45 states, there is 
about a trillion dollars of burden on our $11.4 trillion GDP 
that is because of our internal revenue code.
    From a business perspective could you describe for this 
Committee how that might affect the way you do business, your 
bottom line and the employment levels you could offer and the 
benefits and payroll that you could offer?
    Mr. Arth. Certainly. Thank you.
    You may be aware that NSBA is perhaps one of the first 
business organizations that came out in support of the Fair Tax 
which is in fact a national sales tax model predicated upon the 
elimination of the income tax system in its entirety. And the 
Fair Tax would provide not only revenue to fund the federal 
government but would also generate sufficient funds to replace 
the current payroll tax structure. So the organization and 
myself personally, you know, support this notion.
    One area in particular--well, first of all let me say it is 
not going to be totally simple because the state of Ohio does 
have a state sales tax and, as you said earlier, anyone who 
would say they are in full compliance, you know, just ask the 
bureaucrats to come in and prove them wrong, there are even in 
the existing sales tax laws a great deal of complexity. And so 
all the complexity does not disappear.
    But I think it would be a much more transparent process--I 
am sorry, not transparent--visible process. Everybody involved 
in paying taxes would see that they are paying taxes. We do not 
have that today.
    In a competitive arena as we have now with global 
competition it would actually put us in a more advantageous 
position face to face with our foreign competitors. In fact, I 
find it ironic that we have got this problem with our foreign 
sales corporations that are I guess in large part a result of 
our current income tax structure as opposed to advantages 
inherent in the VAT taxes that other countries have.
    So I can see economic advantages to it. I can see 
simplicity factors involved. All the way around I would support 
it 100 percent.
    Mr. King. I thank you, Mr. Arth. Would any of the other 
witnesses testify on that?
    And I do not blame you for taking a pass on that. It is a 
little off the subject matter.
    But I want to thank the Chair for indulging me. And any 
time I get the chance to get some of that on record, especially 
with the level of background and expertise that is demonstrated 
her I appreciate it. Thank you, Mr. Chair.
    Chairman Schrock. Thank you, Mr. King.
    Mr. Gattuso, in your testimony you called for new 
government bodies to be created to focus on regulatory 
analysis. And I think those are good ideas, very innovative 
ideas. Could not expansion of the SBA's Office of Advocacy 
serve the same purpose, could providing more resources to OMB 
do it?
    Mr. Gattuso. Well, I certainly think that that would be a 
contribution to the solution. But I think you also need an 
agency that is independent completely of the executive branch. 
Expansion of the SBA, obviously as I said, I do not believe 
would be a good substitute for a congressional review office.
    Chairman Schrock. Separate and apart from either agency?
    Mr. Gattuso. That is right. That is right.
    Chairman Schrock. In the president's manufacturing agenda 
he announced plans for a regulatory review function in the 
Department of Commerce. Its purpose though is to review 
regulation from other agencies. Does that have merit? Does that 
have promise?
    Mr. Gattuso. Oh, I am in favor of anyone who wants to take 
a hard look at regulations and see whether they in fact are 
serving their purpose as well or effectively as possible. 
Again, however, I think that there is a need for the review, 
some review, to be independent. Any review mechanism that is 
inside the executive branch will face institutional conflicts.
    If it is the policy or especially looking at regulations 
that have already been adopted it would be very difficult for 
one department of the executive branch to come back and say, 
well, this was unjustified, this was not adequately done. Just 
politically that would be very difficult. That is again why you 
need independence.
    Chairman Schrock. The bottom line is it needs to be 
independent?
    Mr. Gattuso. Yes. Among other places.
    Chairman Schrock. Okay. Do you all have any concluding 
comments, any thoughts before we adjourn? Ms. Dudley?
    Ms. Dudley. Let me just respond briefly to that.
    Chairman Schrock. Sure.
    Ms. Dudley. Because I agree with James. I think you need 
your own office that is independent from the executive branch. 
That does not mean that OMB is not doing a good job. And the 
Office of Advocacy I think they have been very effective since 
SBREFA was passed. So I have high hopes for the Commerce 
Department office as well because I think what you have done 
with those recent bills really, with the SBREFA really has made 
a difference. But you do need your own office.
    Chairman Schrock. I think the Office of Advocacy, correct 
me if I am wrong, saved businesses $60 billion last year--$6 
billion. Oh, it would be nice if it was 60. Six billion, that 
is a lot of money.
    Ms. Dudley. Yes.
    Chairman Schrock. So they do a good job.
    Well, we thank you all. You have really given us a lot to 
think about. Thanks for coming all the way from Ohio, we really 
appreciate it. You are on the frontlines, you are at the top of 
the spear so you know very well what is going on and we need to 
listen to you.
    Mr. Arth. Well thank you.
    Chairman Schrock. And I appreciate you being here because 
this is something we are going to go forward with. We are dead 
serious about making some of these things happen. Because I 
hear it when I go home all the time that we just need to make 
sure we put your words to actions and get on with it. And I 
think we will.
    So thank you all for being here. This hearing is adjourned. 
Thank you.
    [Whereupon, at 12:10 p.m., the Subcommittee was adjourned.]

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