[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
COST-JUSTIFYING REGULATIONS: PROTECTING JOBS AND THE ECONOMY BY
PRESIDENTIAL AND JUDICIAL REVIEW OF COSTS AND BENEFITS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, COMMERCIAL
AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MAY 4, 2011
__________
Serial No. 112-48
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]
Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Courts, Commercial and Administrative Law
HOWARD COBLE, North Carolina, Chairman
TREY GOWDY, South Carolina, Vice-Chairman
ELTON GALLEGLY, California STEVE COHEN, Tennessee
TRENT FRANKS, Arizona HENRY C. ``HANK'' JOHNSON, Jr.,
DENNIS ROSS, Florida Georgia
[Vacant] MELVIN L. WATT, North Carolina
MIKE QUIGLEY, Illinois
Daniel Flores, Chief Counsel
James Park, Minority Counsel
C O N T E N T S
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MAY 4, 2011
Page
WITNESSES
John D. Graham, Ph.D., Dean of the School of Public and
Environmental Affairs, Indiana University
Oral Testimony................................................. 2
Prepared Statement............................................. 4
Jeffrey Holmstead, Partner, Bracewell & Giuliani, LLP
Oral Testimony................................................. 13
Prepared Statement............................................. 15
Sally Katzen, Senior Advisor, Podesta Group, Visiting Professor,
New York University School of Law
Oral Testimony................................................. 19
Prepared Statement............................................. 21
Harold Furchtgott-Roth, President, Furchtgott-Roth Economic
Enterprises
Oral Testimony................................................. 34
Prepared Statement............................................. 35
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Trey Gowdy, a Representative
in Congress from the State of South Carolina, and Vice-
Chairman, Subcommittee on Courts, Commercial and Administrative
Law............................................................ 46
Prepared Statement of the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Ranking Member,
Subcommittee on Courts, Commercial and Administrative Law...... 49
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 51
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Member, Subcommittee on Courts, Commercial and
Administrative Law............................................. 54
Letter from the Coalition for Sensible Safeguards................ 57
Response to Post-Hearing Questions from John D. Graham, Ph.D.,
Dean of the School of Public and Environmental Affairs, Indiana
University..................................................... 60
Response to Post-Hearing Questions from Jeffrey Holmstead,
Partner, Bracewell & Giuliani, LLP............................. 64
Response to Post-Hearing Questions from Sally Katzen, Senior
Advisor, Podesta Group, Visiting Professor, New York University
School of Law.................................................. 70
Response to Post-Hearing Questions from Harold Furchtgott-Roth,
President, Furchtgott-Roth Economic Enterprises................ 73
COST-JUSTIFYING REGULATIONS: PROTECTING JOBS AND THE ECONOMY BY
PRESIDENTIAL AND JUDICIAL REVIEW OF COSTS AND BENEFITS
----------
WEDNESDAY, MAY 4, 2011
House of Representatives,
Subcommittee on Courts,
Commercial and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 3:08 p.m., in
room 2141, Rayburn Office Building, the Honorable Trey Gowdy
(Vice-Chairman of the Subcommittee) presiding.
Present: Representatives Gowdy, Gallegly, and Cohen.
Staff present: (Majority) Daniel Flores, Subcommittee Chief
Counsel; John Hilton, Counsel; Ann Hawks Woods, Counsel;
Cecilia Daly, Counsel; Allison Rose, Professional Staff Member;
Ashley Lewis, Clerk; (Minority) James Park, Counsel; and Susan
Jensen-Lachmann, Counsel.
Mr. Gowdy. The Subcommittee will come to order. I want to
welcome and thank all of our witnesses, acknowledge Mr. Cohen,
and I believe Mr. Gallegly is on his way.
Today is going to be somewhat unusual with vote schedules,
and we want to be sensitive to your individual schedules as
well. Mr. Cohen and I are going to waive our opening
statements. And, Mr. Graham, I think you may have a plane to
catch, so if your compatriots are okay with it, we may let you
do your opening statement, direct any questions that may be
applicable to you, and then handle the other three witnesses,
unless there is vigorous opposition to that.
I think I need to swear the witnesses, which in my other
job somebody else did in a black robe. So, let me see if----
Mr. Cohen. They do not have to be sworn.
Mr. Gowdy. They do not?
Mr. Cohen. No, it is not like in a----
Mr. Gowdy. Good. Fine with me.
All right. Let me introduce John Graham, who is the dean of
the School of Public and Environmental Affairs at Indiana
University, one of the largest public policy schools in the
United States. Dr. Graham has a bachelor's degree in politics
and economics from Wake Forest University, a master's degree in
public affairs from Duke University, and a Ph.D. in urban and
public affairs from Carnegie Mellon University. He is the
author and editor of numerous books, articles, and academic
papers. From 2001 to 2006, Dr. Graham served as the
administrator of the Office of Information and Regulatory
Affairs in the Office of Management and Budget. With that, Dr.
Graham, we would welcome you for your opening statement?
TESTIMONY OF JOHN D. GRAHAM, Ph.D., DEAN OF THE SCHOOL OF
PUBLIC AND ENVIRONMENTAL AFFAIRS, INDIANA UNIVERSITY
Mr. Graham. Thank you, Mr. Gowdy, and thank you to everyone
in the room for your flexibility in allowing me to get back to
my flight.
Our topic is benefit-cost analysis and its role in Federal
regulatory decision making. Let me start by saying that this
topic has an interesting bipartisan history, and in the
literature, there is some conflict on where it actually begins
in American political debate. My own view is the most important
starting point was President Jimmy Carter, a small businessman
himself who urged and assembled his White House economists to
begin looking at regulations, and he also championed the
Paperwork Reduction Act, which ultimately established the
office in OMB that has a central role in this area.
Ronald Reagan's impact, of course, cannot be
underestimated. This the President who established the process
of OMB review of regulations with cost-benefit analysis being a
central element.
President Clinton reaffirmed a lot of these basic
strategies and, I think importantly, focused the efforts on the
most significant of the Federal rules so that the effort around
analysis and economics would be concentrated.
I worked for President George W. Bush. He made strong
efforts to improve information quality and peer review as it
relates to cost-benefit analysis. And I am very pleased that
President Obama has reaffirmed the importance of cost-benefit
analysis in the regulatory process.
So, this raises the following question: if all of these
Presidents are in agreement that cost-benefit analysis is
important, it should be part of the regulatory process, why
would people be considering legislation where Congress would
require agencies to move in this direction? And I think there
are two basic answers to that question.
One is that a President's political preferences sometimes
get in the way of the basic good government principle at
looking at the benefits and costs of regulatory action. And I
will give you as an illustration the President I worked for.
After 9/11, the political imperative to pass Homeland
Security regulations was overwhelming. And I must admit there
were many regulations submitted to me as OIRA administrator
under the banner of homeland security that were fairly
expensive and fairly intrusive. Can I testify to you that each
and every one of these was subject to a careful, cost-benefit
analysis that looked at less expensive alternatives? To be
honest with you, we did the best we could under the
circumstances, but a President does not always want to go
forward with the cost-benefit test when they have other
political reasons to want to support another activity. As a
result, we quantified by 2004 that half of the cost of all new
regulations in the Federal Government were due to Homeland
Security regulations.
My own view is if Congress had required us to do cost-
benefit analysis of these regulations and it had been
judicially enforceable, you would have given the airline
industry, the colleges and universities who were impacted by
these regulations, an ability to put reasonable pressure, not
undue pressure, on the Federal Government to make sure that
these regulations were necessary and worthwhile.
So, the first reason that we need legislation is that
presidential preferences do not always lead to faithful
implementation of the cost-benefit requirement in these
executive orders.
The second reason is that the career staff at the agencies
and OMB are human beings, and they are imperfect. And they
develop regulations and promulgate them oftentimes without
adequate economic and scientific basis. If, however, you have
an enforceable check in court against the quality of their
work, their incentive to do that work increases substantially.
And as a consequence, there is a large body of literature
showing the limitations of the existing--the quality of the
existing activity.
So, what should be the basic components of any kind of
cost-benefit mandate of legislation in this area? One, it seems
to me all cabinet and independent agencies should be subject to
this type of benefit cost requirement. My own view is you
should just start with the principles in the Clinton-Gore
executive order in 1993, codify them unless there is a
compelling reason to use other language.
Second of all, I think this should be applied not only to
regulations, but to so-called guidance documents that are
really rules in their actual practical effect on businesses and
on state and local governments.
Third, I think it needs to be a judicially enforceable
requirement; otherwise, you have not done anything different
than what the Presidents have already done by issuing an
executive order requiring cost-benefit analysis.
And finally, it needs to be a benefits-justified cost test
to make sure that the executive branch can account for
qualitative factors as well as the quantitative benefits and
costs.
So, I have given you some examples of the kinds of things
that should be in there. Let me conclude by saying cost-benefit
analysis, like accounting and other tools, can be gamed. There
is a garbage in/garbage out problem that needs to be worried
about. There are ways to address this in the legislation by
requiring OMB to issue technical guidance on how to do benefit-
cost analysis, and by referencing the information quality and
peer review requirements that OMB has already adopted.
So, in short, I think that really cost-benefit analysis as
a tool, as part of a process of regulation is a good government
principle. There are times when Presidents would prefer not to
follow good government principles for whatever reason. The
regulated communities, whether they be business or state and
local governments, need to have safeguards in situations when
the executive branch does not adhere to these principles.
Thank you very much for the opportunity to be here today.
[The prepared statement of Mr. Graham follows:]
Prepared Statement of John D. Graham, Ph.D., Dean,
Indiana University School of Public and Environmental Affairs
introduction
My name is John D. Graham, Ph.D. I am currently Dean of the Indiana
University School of Public and Environmental Affairs--SPEA
(Bloomington and Indianapolis, Indiana). SPEA is one of the largest
public affairs schools in the United States and has graduate programs
that are ranked in the top five by US News and World Report and by the
National Research Council/National Academy of Sciences. Prior to
joining IU in 2008, I served as Dean of the Frederick Pardee RAND
Graduate School in Santa Monica California (2006-8), as Administrator
of the White House Office of Information and Regulatory Affairs in the
U.S. Office of Management and Budget (2001-2006), and as tenured
Professor of Policy and Decision Sciences at the Harvard School of
Public Health (1985-2001). For twenty-five years, I have taught the
analytic tools of risk analysis and benefit-cost analysis in the
classroom and published research on the application of these tools to
health, safety and environmental issues. In fact, my doctoral
dissertation at Carnegie-Mellon University (1983) was a benefit-cost
evaluation of automobile airbag technology. While my testimony today
draws on my academic expertise, it also draws on my experience at OMB,
where I supervised a staff of fifty career policy analysts as they
reviewed benefit-cost analyses performed by Cabinet agencies such as
the Department of Labor, the Environmental Protection Agency, the
Department of Homeland Security and the Department of Transportation. I
am honored to have the opportunity to express my opinions on how
benefit-cost analysis can be used more effectively to improve the
federal rulemaking process. The views I express are strictly me own,
and do not necessarily represent the views of SPEA or Indiana
University.
terminology
With respect to terminology, the phrases ``cost-benefit analysis''
(CBA) and ``benefit-cost analysis'' (BCA) are synonyms and thus can be
used interchangeably. I prefer the phrase BCA because it reminds
students and policy makers that this analytic tool is aimed at
increasing the benefits of regulations as well as reducing unnecessary
costs. (B also has the alphabetical advantage over C!) When regulatory
options are compared, a BCA tells us which option produces the largest
surplus of benefits minus costs (assuming all benefits and costs can be
quantified in monetary units). When only some benefits and costs can be
quantified (or monetized), the net-benefit surplus (or deficit) is
reported but the decision maker is also informed of any important
benefits and costs that could not be quantified. After considering both
benefits and costs (quantitative and qualitative), OMB instructs
agencies to make a determination as to whether the benefits of a rule
justify the costs, compared to doing nothing and compared to other
viable regulatory options.
The phrase ``cost-effectiveness analysis'' (CEA) refers to a close
analytic cousin of BCA. With CEA, the measure of effectiveness is
expressed in physical units (e.g., lives saved or tons of pollution
prevented), and the outcome of a CEA is the best option indicated by
``bang for the buck'' (e.g., the regulatory alternative that saves the
most lives given a budget constraint, or the alternative that achieves
an environmental goal at minimum cost to society). It is sometimes
useful for agency analysts to conduct a CEA in addition (or instead of)
a BCA, especially if the benefits of the rule are difficult to quantify
in monetary units.
bipartisan support for regulation informed by bca
The origins of BCA in federal regulatory policy are a matter of
some academic debate but the push for cost-justified regulations goes
back at least to the administration of President Jimmy Carter. As a
small businessman, President Carter knew that the costs of regulation
were a serious national problem and he deployed White House economists
in a determined effort to reign in business regulations that were too
costly. President Reagan went further and placed OMB in the driver seat
during interagency reviews of the BCAs or CEAs prepared by federal
agencies. President Clinton reaffirmed the legitimate role of benefit-
cost analysis in regulatory decision making while focusing OMB's
efforts on a smaller sample of significant rules and recognizing the
primacy of agency policy discretion. President George W. Bush largely
reaffirmed the benefit-cost language in the Clinton Executive Order and
I interpret President Obama's position on BCA in regulatory policy to
be largely consistent with the positions espoused by previous
presidents of both parties. Thus, although there are some advocacy
groups and legal academics who oppose the use of BCA in federal
regulatory policy, I think it is fair to say that recent Presidents of
both parties have expected agencies to prepare benefit-cost analyses
and use the insights from those analyses when making regulatory
decisions.
I would also like to point out that leading members of Congress
from both political parties have been consistent advocates of a
stronger role for BCA in federal regulatory policy. For example,
Senator Carl Levin (D-Michigan) and Senator Orrin Hatch (R-Utah) have
been pioneers of BCA proposals in the Senate. Much can be learned by
reviewing the relevant speeches and legislative proposals of these
members for the last twenty years.
myths about bca
In my testimony today I would like to dispel some popular
misconceptions about BCA. Much of my testimony about myths draws on a
comprehensive article, ``Saving Lives through Administrative Law and
Economics,'' University of Pennsylvania Law Review, 157(2), December
2008, 395-540 that I have made available to subcommittee staff and
would like to have inserted in the record of this hearing.
Myth #1: It is not feasible to quantify the benefits of public
health, safety or environmental regulations.
Due to thirty years of progress in public health science,
environmental science, risk assessment, and health/environmental
economics, it is now feasible to produce (at least approximate)
estimates of the benefits of federal health, safety and environmental
regulations. The validity of benefit estimates varies depending on the
quality of science used by federal agencies. For example, the projected
number of lives saved by DOT's mandatory airbag regulation (1977) was
estimated based on laboratory crash tests with cadavers, observed rates
of safety belt use, injury surveillance data from police reports and
hospital records, and engineering judgment. Based on more than 30 years
of real-world experience with the airbag regulation, we now know that
the safety benefits are smaller than projected by regulatory analysts
but benefits are still large enough to justify the extra investment in
airbag technology. In contrast, EPA's air pollution regulations have
been shown to have higher public health benefits than previously
thought due to better understanding of how the rate of premature death
rises in a community due to the inhalation of soot and smog. As rates
of urban air pollution have declined, the trends in mortality rates
from chronic diseases (age adjusted) have been downward. Today, some of
the best analytic work on the benefits of federal regulations is
performed by analysts at the U.S. Environmental Protection Agency.
While the benefits of federal regulations are sometimes overestimated
and sometimes underestimated, there is no evidence that use of BCA
causes any systematic bias in the estimates of benefits prepared by
federal agencies.
Myth #2: It is unethical to consider costs when making regulatory
decisions about medicine, public health, safety, and environmental
protection.
The notion that ``safety'' or ``protection'' from harm is an
absolute right, regardless of costs, is not defensible on either
philosophical or practical grounds. Philosophically, complete safety
(also called ``zero risk'') is an illusion because well-informed
citizens choose, on a daily basis, to assume many risks in life in
exchange for a variety of benefits (e.g., we reduce travel time by
driving faster on four-lane highways than we do on two-lane roads).
When risks are imposed on citizens without their explicit consent
(e.g., when a pedestrian inhales pollution emitted by a car), the
philosophical analysis is more difficult but the ethical solution is
not necessarily a mandate for zero risk. A more compelling resolution
is that regulators should protect citizens from imposed risks to
whatever extent the affected citizens would prefer, assuming those
affected citizens were to experience both the benefits and costs of the
regulation. Philosophically, this is a standard of hypothetical
informed consent, and it forms the ethical foundation of BCA. To reject
the informed preferences of citizens in favor of absolute safety is a
form of authoritarianism--an ill-considered rejection of the ideals of
personal freedom and consumer sovereignty that are at the heart of
democratic capitalism. The practical objections to zero risk are even
more compelling. If regulators go so far in the pursuit of complete
safety that they make families poorer (e.g., through higher prices for
regulated, zero-risk products), there may be more imposed risk from the
induced poverty than from the target risk that regulators seek to
eliminate. For example, many regulations in the energy sector have the
practical effect of raising the prices of gasoline at the pump. For
many low-income households, rising gasoline prices have adverse
ramifications for all aspects of welfare (including health). Thus,
practical considerations favor some form of benefit-cost determination
rather than blind pursuit of zero risk.
Myth #3: BCA is a mathematical straight jacket that prevents
consideration of important qualitative values such as fairness and
special concern for the welfare of children.
The falsehood here is the assumption that a benefit-cost
determination may be based only on a numerical comparison, without
consideration of qualitative values such as fairness and the special
needs of children. It is well-accepted in the field of BCA that, while
many benefits and costs can be quantified, some valid considerations
are essentially intangible. BCA textbooks call for intangible benefits
and costs to be disclosed by analysts and considered by regulators. For
example, suppose that a federal regulation will reduce the rate of lead
poisoning among children in poor urban communities. Assume further that
the quantified benefits and costs of this regulation are roughly equal,
without considering the fact that low-income children are the primary
beneficiaries. A fairness argument can be made that a tie-breaking,
intangible consideration favors the regulation: the notion that the
federal government owes a special sense of fairness to low-income
children who are less able than middle-class or wealthy adults to
protect their own interests. Notice that this legitimate, fairness
consideration may not be as compelling if the costs of the regulation
are also borne by low-income families. In other words, a benefit-cost
determination is not a mathematical straight jacket the prevents
analysts and regulators from giving weight to compelling intangible
considerations.
Myth #4: BCA of business regulations is biased against regulation
because the costs of regulations are exaggerated and the benefits of
regulation are understated.
For a variety of reasons, it is sometimes asserted that analysis of
business regulations is biased because costs are exaggerated and
benefits are under-valued. The literature now includes several dozen
regulations where the ex post estimates of benefit and cost are
compared to the ex-ante estimates made by agency analysts before
regulations were issued. While many of these estimates have been shown
to have errors, there is no universal pattern that costs are
exaggerated and benefits are underestimated. Indeed, my summary of this
literature is that it shows no systematic bias in the quantitative
estimates of benefits and costs by federal agencies.
Myth #5: BCA is so complicated and time consuming that it slows the
regulatory process to a halt.
There is a theory in the legal literature that the federal
regulatory process has become so ``ossified'' by procedural and
judicial requirements that the pace of federal rulemaking is now at a
snail's pace. A related concern is that the addition of BCA
requirements will exacerbate the ossification, and slow down the
issuance of necessary regulations. Based on the available empirical
literature and my five years of experience at OMB, I can assure you
that federal agencies have no difficulty issuing numerous regulations,
including highly expensive ones, when there is a political desire to do
so. Consider, for example, the rapid flow of homeland security rules
after the tragic events of 9/11. Anyone who has been following the
Obama administration is aware that numerous new regulations are being
proposed and finalized, despite the BCA requirement and other
procedural requirements on agencies. And since most important
regulations are already litigated by a wide range of stakeholders, and
federal judges are already considering the findings of BCA, it is hard
to see how a well-crafted statutory requirement for BCA could lead to
more ossification or judicial delays.
Now that I have addressed some of the myths about BCA in federal
regulation, I turn to some constructive suggestions for legislation in
this arena.
suggestions for statutory reform
First, I recommend that Congress pass a simple statutory
requirement that regulators conduct and use BCA (and related tools)
when issuing significant federal rules. Reasonable people can disagree
over how the benefit-cost mandate should be framed but I think it is
sensible to start from the principles in the Clinton-Gore executive
order (1993). I believe it may also be useful to review the legislative
language that Senators Carl Levin and Fred Thompson crafted almost
fifteen years ago, including some of the refinements made in
consultation with the Clinton-Gore administration. I am very pleased
that President Obama has recently reaffirmed presidential commitment to
BCA as a valuable tool in rulemaking.
Basically, there needs to be a statutory requirement that
regulators perform BCA, a requirement that a preferred regulatory
option have benefits that justify costs, and some safeguards to ensure
that the BCA is performed with a high degree of quality. For example,
the agency should be required to analyze at least one option that is
less expensive and one option that is more expensive than the agency's
preferred option. In other words, analyses that simply compare one
regulatory option to ``doing nothing'' should not be considered
adequate. Since presidents and agencies do not always adhere to the
provisions in presidential executive orders, it is imperative that
judicial review of the new statutory requirements be authorized. The
benefits-justify-costs test should be applicable to each significant
regulation, unless the agency's authorizing statute has explicitly
prohibited consideration of BCA.
Second, I recommend that Congress require OMB to issue guidance on
the proper conduct of BCA, and that this guidance be updated
periodically (e.g., at least every ten years or as soon as there is
significant change in the state of the art of BCA). OMB currently uses
a guidance document called Circular A-4 that was issued in 2003 after
public comment, interagency deliberation, and expert peer review. I
recommend that Congress require a similar process in the future,
placing OMB in the lead in consultation with the White House Council of
Economic Advisors and other agencies. In order to better ensure that
the data and models used by agencies are valid and appropriate, the new
statutory mandate should reference the information-quality and peer-
review guidelines that have been issued by OMB, and provide
stakeholders an opportunity for judicial review in cases where these
well-developed guidelines are not followed by agencies.
Third, I recommend that Congress expand the scope of the statutory
mandate to include significant guidance documents as well as
legislative rules, at least in cases where the agency's action to issue
a guidance document has the same practical effect on regulated parties
as a regulation. Senator Collins (R-Maine) has already proposed a bill
in the Senate to apply BCA to guidance documents, and I urge the
subcommittee to take a careful look at her guidance-related provisions.
Finally, Congress should consider adding a distributional arm of
the ``benefits-justify-costs'' test that ensures that the welfare of
low-income Americans is considered before a significant rule is issued.
Thus, even if a regulation passes the benefit-cost test for society as
a whole, it may not be advisable if low-income Americans are likely to
incur more costs than benefits. For example, energy-related regulations
that increase the price of gasoline at the pump have a
disproportionately harmful effect on low-income families, especially
those families living in small towns and rural areas where alternatives
to automobile travel are not available. The benefit side of the ledger
also needs to be considered, since some regulations offer significant
benefits to low-income families while others do not. As a matter of
fairness, regulators owe it to the most economically disadvantaged
families in society to explore whether a proposed rule will make these
families better off or worse off. My 2008 article in the Pennsylvania
Law Review provides a more complete discussion of the philosophical and
practical aspects of this recommendation.
In summary, it has been accepted by U.S. presidents for at least 30
years that BCA should play an important role in federal rulemaking.
While OMB and federal agencies have made significant progress in this
direction, it is well known that OMB and federal agencies do not
implement this policy with consistency and a high degree of quality.
Congress should build on the logic of the recent presidential orders by
passing a simple statutory requirement that is backed by the force of
judicial review. If OMB and federal agencies know that federal courts
are authorized to review the role of BCA in federal regulation, they
will take their BCA-related responsibilities much more seriously than
they do today.
__________
Mr. Gowdy. Thank you, Dr. Graham. Let me ask you a couple
of questions, and then I will recognize the gentleman from
Tennessee.
Is it fair that some benefits are not quantifiable? Is that
a fair statement to say? And how would you address that in a
cost-benefit analysis if some benefits are not easily
quantifiable?
Mr. Graham. Let me start by saying basic textbooks in
benefit-cost analysis acknowledge that not all costs and
benefits will be quantifiable, or, even if they can be
quantified in the physical units, like tons of pollution
prevented, for example, they may not be quantifiable in dollar
terms. So, clearly a good cost-benefit analysis lays out--think
of it as the advantages and the disadvantages of the
regulation, and quantifies those that can be quantified. But
there is no point in forcing agency analysts to try to quantify
things that cannot be quantified.
So, in the final analysis, the decision about whether the
benefits justify the costs is a policy judgment made by a
regulator. That does not mean that the regulator can do
anything, but they do have to make a judgment.
Mr. Gowdy. Dr. Graham, the best argument for codification,
is it the political whims and caprices that change with
Administrations? Is it judicial review? What are the three
best, strongest arguments for codification in your judgment?
Mr. Graham. Well, I think the first thing to keep in mind
is that at the career level, the staff members in the
regulatory agencies, whether it be the Labor Department or
Homeland Security, if they know that their regulation is going
to be subject to judicial review for its benefit cost
justification, they will devote more serious effort to the
benefit-cost analysis. I think that is a very important thing.
Without that codification, you are not going to get that type
of judicial review on the benefit-cost analysis implementation.
And then the second reason is, various Presidents--we can
all pick our examples--they have called them political or
policy preferences or campaign commitments in particular areas
that they are going to want to proceed with, even though in
some cases they really do not have a very good justification
based upon benefits and costs. And the people who would be
harmed by those regulations, they need the ability--the
safeguards of the courts to ensure that those commitments and
political commitments are not imposed on them without careful
analysis of benefit and cost.
Those would be my two primary reasons.
Mr. Gowdy. All right. You said it is important to apply
cost-benefit analysis to agency guidance documents because they
have the same practical effect on regulated parties as a
regulation. How can this happen? And, secondarily, does this
mean that an agency can avoid the notice and comment process by
just issuing guidance documents?
Mr. Graham. Well, the short answer is yes. But there are a
couple of good lawyers on this panel sitting next to me, and
they can describe to you in better detail than I do the
creative ways that agencies work to basically impose a burden
on, say, a business without actually ever writing a regulation.
They simply issue a guidance document and say, it would be a
good idea if your plant was designed in this way or if it
operated in that way. And then in addition, they say we might
have visits or enforcement actions at your facility at some
point in the future, and it is all kind of informal. But as a
practical effect, the agency is saying you better do what this
guidance document says.
That is, I think, is a very serious problem. And agencies,
because rulemaking is more expensive, it takes longer, they
like to do as much as they can through these guidance
documents.
Mr. Gowdy. Can codification force agencies to quantify
factors they might otherwise say are not quantifiable?
Mr. Graham. I am not sure. I think the most important
factor in the process of quantification is the peer review
process where scientists, engineers, and economists from
universities and from non-profit organizations, they review the
analyses that are prepared by agencies. And they may say in
certain cases, you know, there are data available that allow
you to quantify this benefit or this cost. Or they may say, you
are trying to quantify this, but the data you have are not
adequate to support that. It is that technical peer review
process which needs to be part of this legislation that I think
is the best assurance that the quantification process is
proceeding in a valid manner.
Mr. Gowdy. Thank you, Dr. Graham. At this point I would
recognize the distinguished gentleman from Tennessee and
biggest fan of the Memphis Grizzlies in Congress, Mr. Cohen?
Mr. Cohen. Thank you. Thank you. And even though they lost
yesterday, they are still very much alive. They will come back.
Mr. Graham, of the Atlantic Coast Conference, which also
plays basketball on a different level, when you worked with the
Bush Administration and you had these regulations come up on
Homeland Security, how did you determine what we should do on a
cost-benefit analysis when you are talking about people's lives
and unknowns, such as Al-Qaeda?
Mr. Graham. Well, I think that is a great question. And
remember, I am talking about this period, maybe the first 18
months after 9/11 where there is a lot of emotional concern in
the country about trying to do things to protect the next 9/11.
The Administration had the authority, emergency authority,
to do a wide range of things without any cost-benefit analysis
whatsoever. If they had had the kind of basis that was
necessary to declare an emergency, they could have done so
without any of the analysis I am talking about.
The Administration knew they did not have that as a matter
of intelligence and as a matter of the situation at the time.
So, they proceeded with these regulations through normal
rulemaking process. When they made that decision, they were
implicitly saying that we really ought to follow the same kinds
of procedures that would normally apply for the rulemaking.
And in the case of these Homeland Security regulations,
what I thought was the most interesting was the requirements as
they are implemented in the United States and around the world
are actually quite different. All of us travel to go through
airports. Have you ever noticed how much variation there is
between the specific requirements when you actually go through
screening? Do each of these differences have a justification?
Sometimes your shoes are off, sometimes they are on. Sometimes
your belt is off, sometimes it is on. And it varies.
And I do not think there, frankly, is a really good, sound
justification for a lot of this variation, and that tells me
that the evidential basis for what is being required is
somewhat thin. Does that mean we should not have any of these
regulations? No. But I think a little more thought to how they
are designed in the first place is probably a good idea.
Mr. Cohen. I agree with you, and I do not know that much
about the regs, and I thought about them this week when in
Memphis they said you had to take off your belt. They have
never said that before, and sometimes they say it in D.C., and
sometimes they do not. But we never said you had to take off
your tennis shoes or your shoes, and then comes this guy with
the material in his shoes. I mean, how do you quantify that
type of regulation when 200 lives would have been in the
balance if the guy had a better lighter or BIC or whatever?
Mr. Graham. You actually just did a little bit of
quantification. And it does not require much in terms of number
of lives saved, even potentially, to justify a significant
regulation. So, the real question is, do they have the basis
for these different types of distinctions and why they are
requiring passengers to engage in this type of screening versus
another type of screening. If they have that basis, even on a
qualitative basis, I think you could potentially justify these
types of regulations.
I am just trying to be candid with you and be honest with
you that I have tire tracks on my chest from rules after 9/11
that rolled through this Federal Government. You know, it
probably would be a good idea right now to go back and look at
some of those and see whether all of them are still really
necessary.
Mr. Cohen. Yeah, well, I do not disagree with you, and it
is an interesting subject. I need to spend some more time on
it. But some of the stuff is absurd, and I think we go
overboard on some of the things. But nevertheless, safety, it
is very difficult to do that in terms of dollars and cents. And
some of it just seems like whether or not it makes sense, and
sometimes we get into these regulations, like on the belt and
all. We have really created an industry and we cannot get rid
of it because their jobs are there, and there are companies
that sell that equipment, and so they have become ones that
push forward because, even though it really does not do us any
good. So, I do not how you get around that.
But the President has said some things about fairness, and
he has talked about equity, and he has been criticized for that
when considering rules with lead poisoning among poor children.
Would you agree that the President has probably got something
appropriate when he is dealing with fairness and equity or
dealing with poor children and lead poisoning, and that maybe
the criticism is not fair?
Mr. Graham. I have not seen the details of the criticism
that the President made. But I do cite in my testimony what I
think is an important role that fairness considerations play in
a reasoned development of a regulation. And sometimes, for
example, when you take energy regulations that increase fuel
prices at the pump, those regulations have a disproportionate
adverse impact on lower income Americans, particularly
Americans who live in rural areas and in small towns where
alternative transportation is not available. In that kind of a
case, even if the benefits of that regulation would be somewhat
greater than the cost, a fairness consideration might say,
well, really this is not a very good time to impose this kind
of burden on the lower income elements of our population.
So, I am a firm believer that fairness considerations,
particularly as related to low income populations, do have an
important role in a benefit cost framework. But I would have to
look in more detail at exactly what President Obama said to
understand his particular claim.
Mr. Cohen. So, if the Chairman would allow me for just 20
seconds, could you be willing to give me and/or the Chair and
the Committee some of those tracks that you have got and tell
us which of those regulations you think we should not have
passed and an explanation so that we may look at that?
Mr. Graham. It will be easy because my boss at the time was
Mitch Daniels, the current governor of Indiana. And he allowed
me in 2004 to actually publish an annual report from OMB that
listed all of these Homeland Security regulations, what was
estimated as to their cost, and what their rationale was. And
we allow readers to make their own determination.
Mr. Cohen. Do you have a Cliff's Note of that?
Mr. Graham. Yeah, and it is on the website. It is a nice
table actually, just maybe a two-page table that lays it all
out. So, I will get you a copy of that.
Mr. Cohen. Thank you, Mr. Chairman. Thank you, sir.
Mr. Gowdy. Yes, sir, Mr. Cohen. Dr. Graham, that buzzer, I
think, means something, but I am going to recognize the
distinguished gentleman from the great state of California, Mr.
Gallegly, for his questioning. And then with the indulgence of
the other three panelists, we aspire to go vote and then
return.
Mr. Gallegly?
Mr. Gallegly. Thank you, Mr. Chairman. I would just like to
make a quick observation, and I know you have a flight to
catch, and we have votes to take, and we are behind a couple of
hours already.
But in follow-up to Mr. Cohen, relative to airport security
and so on, you know, we all do a lot of traveling. In fact, I
have accumulated over 1,700 trips from one coast to the other
because I commute every week to California. And you do get
familiar with that process all too well.
But the regulations, and I would like to know a little bit
about maybe the flexibility in some of these regulations,
because you mentioned, you know, you go into one airport, they
require a belt, you go in another airport, it is taking your
laptop out of the case, or your iPad or whatever, and then the
next week it is different.
Well, an observation that I have made for some time, and I
happen to know a little bit about the rationale behind it, and
it has to do with flexibility sometimes is important, because
when you are dealing with terrorists, the most important thing
you can do is keep them flat footed and off guard. And every
time you move a guard from one corner today to the next corner
the next day, they never know which corner the guard is going
to be on. So, if everybody is in the same place doing the same
thing every hour with a belt or with a laptop or whatever, it
has a strategic benefit. Could you maybe respond to that a
little bit and how regulations impact on the importance of
flexibility?
Mr. Graham. Well, first of all, I think you make a really
excellent point, that in order to have an effective strategy in
counter-terrorism through these kinds of regulations, you would
have to have some changes over time that keep the terrorists
off balance in terms of their targeting.
The examples I was referring to were not changes in
practices at the same location. It is that when you are in this
airport, they do it this way, and when you are at that airport,
they do it that way. And to me, it is just not obvious that
that is confusing many terrorists. It just seems to be kind of
an unexplained variation in what this practice is.
But I agree with you. In fact, one of the things I noticed
when I was at OMB and we were issuing all these rules, so many
of the rules that we were issuing were trying to go back and
prevent the incident that had already occurred. But surely a
perceptive and shrewd terrorist, for their next couple of
instances, would not necessarily be replicating the same
pathway and the same targets that were used the time before.
But how many regulations were we doing on all the other
targets? Not very many.
So, I am just trying to admit that the whole process of
regulation in a situation where you have a lot of political,
you know, saliency on an issue like that, it can benefit from
some evidence, some analysis, some benefits and costs.
Mr. Gallegly. The one thing that has certainly become
abundantly clear is you have a very simple and unchallenging
job. [Laughter.]
I appreciate your testimony, and I do know the tremendous
challenges, and they are changing every day. So, but yet we do
have to have regulations.
Mr. Graham. We certainly do.
Mr. Gallegly. But we need to learn how to best prioritize,
and that is why we have the experts out there hopefully that
are doing the right thing. And I feel confident you are. Thank
you.
Mr. Graham. Thank you, sir.
Mr. Gowdy. Thank the gentleman from California. It is the
fervent hope of all three of us that you will make it through
TSA with your shoes and your belt on. Thank you for your
patience.
To the three remaining witnesses, we continue to thank you
for your indulgence. We are grateful for your patience. Mr.
Cohen did much better in math than I did. He added up the
number of minutes that we may be gone, and I am going to let
Judiciary staff and our three witnesses decide how much of
their lives they would like to be imposed on today. So, this
could be a long series.
But you have got a plane to catch. You have lives to live.
I will let higher ranking people than me make the decisions.
But if I see you again, I will look forward to it. If I see you
again another day, thank you for your patience.
We will be adjourned pending votes.
[Recess.]
Mr. Gowdy. We will reconvene. And, again, on behalf of Mr.
Cohen and myself and everyone else involved in the process, we
want to thank you again for your patience and understanding the
vagaries of votes.
Without further ado, it is my pleasure to introduce our
three witnesses.
Jeffrey Holmstead is one of the Nation's leading air
quality attorneys and leads the Environmental Strategies Group
at the law firm of Bracewell and Giuliani. Did I pronounce it
correct?
As the head of the Environmental Protection Agency's Office
of Air and Radiation from 2001 to 2005, Mr. Holmstead saw
firsthand how regulatory agencies conduct and use cost-benefit
analysis. Between 1989 and 1993, Mr. Holmstead served on the
White House staff as associate counsel. In that capacity, he
was involved in the passage of the Clean Air Act amendments of
1990 and the key steps taken to implement that law.
He is a graduate of Yale Law School. He earned his
bachelor's degree, summa cum laude, from Brigham Young
University.
Sally Katzen has enjoyed a distinguished career in legal
practice, government service, and academia. The first female
partner of the law firm Wilmer, Cutler & Pickering, Ms. Katzen
also served as the Section Chair of the American Bar
Association's Administrative Law and Regulatory Practice Group.
She served for 8 years in the Clinton Administration, including
5 years as administrator for the Office of Information and
Regulatory Affairs in the Office of Management and Budget.
She has a bachelor's degree from Smith College and a J.D.
from the University of Michigan School of Law. She has taught
at George Washington University, the University of Michigan,
University of Pennsylvania, and Georgetown, and is a visiting
professor at New York University School of Law.
Mr. Harold Furchtgott-Roth. Have I pronounced that close to
correct? All right. From 1997 to 2001, Dr. Furchtgott-Roth
served as the commissioner of the FCC. Before his appointment
to the FCC, he was chief economist for the House Committee on
Commerce and the principal staff member on the
Telecommunications Act of 1996.
He is a professional economist, the president of
Furchtgott-Roth Economic Enterprises, the author of dozens of
publications, and has authored or co-authored four books, which
means he has written more books than we have read, right?
Mr. Cohen. You can say whatever you want to say about
yourself. [Laughter.]
Mr. Gowdy. Dr. Furchtgott-Roth received his Ph.D. in
economics from Stanford University and a bachelor of science
degree in economics from MIT.
We would like to thank all three witnesses for joining us,
and we will recognize each of you from my left to right, your
right to left, starting with Mr. Holmstead, for 5 minutes and
your opening statement?
TESTIMONY OF JEFFREY HOLMSTEAD, PARTNER,
BRACEWELL & GIULIANI, LLP
Mr. Holmstead. Well, thank you. I am happy to be here. I
wanted to be somewhat informal like Dr. Graham was and just
say, to begin with, I like to think I have a somewhat unique
perspective having seen the regulatory review process both from
the White House and then from EPA and also from the private
sector.
And having done this now for 20 years, worked on cost-
benefit analysis and regulatory review, I want to say this. I
know from my own experience that a lot of the career staff
folks at EPA take cost-benefit analysis seriously and they try
to use it to make regulatory decisions. But I have also seen
that Federal officials sometimes use cost-benefit analysis not
to inform their regulations, but to justify the regulations
that they want to do for other reasons.
Cost benefit analysis is an important regulatory tool, but
it can be done in properly, it can be done poorly, and in some
cases it can actually be misused. And for this reason, I do
think it is important to have some sort of meaningful oversight
of the type of regulatory analysis conducted by regulatory
agencies. And I am enthusiastic that this Subcommittee is
considering these types of enforcement mechanisms that would
make sure that there is a meaningful cost-benefit analysis.
I want to just start with a quick example of what I
consider to be the misuse of cost-benefit analysis. And this
may sound like I am down in the weeds; I do not mean to be. But
there has been a lot of research done over the past seven or 8
years, and Dr. Graham is one of the people doing this research,
showing that reducing fine particle pollution is by far the
most important thing EPA has ever done under any of its
statutes. And, you know, there are arguments about all the EPA
statutes, but I do not think any serious researcher disagrees
that most of the benefits to our society achieved by EPA have
come from reducing these fine particles, which we refer to as
PM2.5.
You would think, and in fact a proper cost-benefit analysis
would say, well, what is the most cost effective way that we
can achieve these benefits? Unfortunately, some EPA officials
have come to use the benefits of reducing fine particles as a
way to justify almost anything they want to do. Again, a proper
cost-benefit analysis, one that actually adheres to the
principles that President Obama has in his executive order and
certainly comes from the prior executive orders, would say,
well, let us look at the most cost effective way of achieving
these benefits. But unfortunately, it has come to be, as I
said, used as a way to justify almost anything.
A particularly egregious example is something that we refer
to as the Utility MACT Rule. This rule is supposed to be
designed anyway to reduce mercury emissions from power plants.
The sole basis for this rule was a determination back in the
year 2000 by then administrator Carol Browner, that mercury
emissions from coal-fired power plants needed to be reduced.
So, they come up with this rule. The rule, as proposed, would
be the most costly rule ever issued by EPA if they finalize it.
And EPA's analysis says it is about $11 billion a year of
costs. But then they say this is still a good deal for society
because it will achieve benefits somewhere between $50 billion
and $100 billion, so this seems like a good deal.
You get into the details, though, and EPA says, well, we
did look at the benefits of mercury, reducing mercury from
power plants, and we have quantified those benefits, and we
estimate those benefits to be somewhere in the range of
$500,000 to $6.1 million. So, benefits of half a million to no
more than $6.1 million, and the costs are $11 billion. And they
say, but that is okay because we are going to get all these
PM2.5 reductions. But what they do not do is say, are there
other ways that would be much more cost effective to achieve
these reductions? And the answer is, there are, and Congress
has specifically adopted a program to deal with these. It
provides much more flexibility, a very different role for EPA.
But EPA has chosen to use this benefits analysis to justify
what it really wants to do anyway, which is to impose very
costly regulations on coal.
I see that my time is running out. I will mention my last
two points. One are, there are other ways that agencies have
learned to avoid oversight. In some cases, and I am sure Ms.
Katzen will probably agree that she has seen this. Two, is that
there are friendly lawsuits that set deadlines on agencies that
effectively prevent OMB from exercising any kind of regulatory
oversight. I would be happy to give you many examples of that
where, again, in the Environmental Protection Agency they will
go into court and come up with a settlement agreement with an
environmental group, and that will compel the Agency to issue a
rule on a certain schedule, a schedule which prevents OMB from
being involved in the process. And I think it is important for
this Committee to at least think about mechanisms to ensure
that there is an opportunity for meaningful regulatory
oversight by the Office of Management and Budget. And I also
believe that the kind of enforcement mechanism that Dr. Graham
talked about where there could be some judicial oversight would
also be a very helpful thing for the process.
Thank you.
[The prepared statement of Mr. Holmstead follows:]
Prepared Statement of Jeffrey R. Holmstead, Partner,
Bracewell & Giuliani, LLP
My name is Jeff Holmstead. I am a partner in the law firm of
Bracewell and Giuliani and the head of the firm's Environmental
Strategies Group. This afternoon, however, I am not appearing on behalf
of my law firm or any of my firm's clients. I am here as a former
official in both the Environmental Protection Agency (EPA) and the
White House who has spent more than 20 years working on the development
of federal regulations.
I served as the head of EPA's Air Office for more than four years
(from 2001 to 2005) and as an Associate Counsel to the President for
almost four years (from 1989 to 2003). During my time in the White
House, I was very involved in the regulatory review process. I have
also been an environmental attorney in private practice for many years.
In both government and the private sector, I have spent many years
thinking about and dealing with cost-benefit analysis as both a
conceptual and practical matter. Thank you for the opportunity to
address the subcommittee on the important issue of presidential and
judicial review of regulations and the role that should be played by
cost-benefit analysis (CBA), which is sometimes referred as benefits-
cost analysis (BCA). Both terms (and both acronyms) mean the same
thing.
It is increasingly clear that we are in an age of unprecedented
federal regulation over many aspects of the Nation's economy. I am most
familiar with the regulations that EPA has issued over the last two
years, but Susan Dudley, the former head of the White House Office of
Information and Regulatory Affairs (``OIRA''), has noted that the Obama
Administration has issued a total of 132 ``economically significant''
rules (i.e. rules whose costs or benefits exceed $100 million per year)
in the two years it has been in office. To put this total in
perspective, this total is approximately 40 percent higher than the
annual rate under Presidents Bill Clinton and George W. Bush.
While it is tempting to draw conclusions by simply looking at these
totals, each rule or set of rules that affect the same entities should
be evaluated by looking at its costs and the benefits it provides to
society--and how these costs and benefits are distributed. Everyone
agrees that many of these rules will impose very substantial costs, but
the rules may still be justified if they provide even greater benefits
to our society. On the other hand, if the cost of a rule exceeds its
benefits, our economy suffers the consequences. Proponents of greater
regulation often pretend that the costs are simply imposed on industry
or ``big business,'' but they also affect--sometimes quite
substantially--workers, consumers, ratepayers, and all Americans who
have privately-funded pension plans or are otherwise invested in
stocks, bonds, or mutual funds.
I can say from my own experience that many career officials at EPA
take cost-benefit analysis seriously and try to use it as much as
possible to make regulatory decisions. Other federal agencies also do
CBA, but perhaps to a lesser extent. I have also seen, however, that
federal agencies sometimes do not use CBA to inform their regulatory
decision, but rather to justify actions they may want to take for other
reasons. CBA is simply a analytical tool that can be used properly or
poorly or even misused. For this reason, it is important to have
appropriate oversight of the analysis conducted by regulatory
agencies--to ensure that regulatory decisions are consistent with the
principles of CBA and with the underlying statutory scheme created by
Congress.
I support this Subcommittee's efforts to consider legislation that
will ensure proper presidential and judicial review of the
justification underlying Federal regulations. To further your efforts,
I would like to focus attention on three key issues relating to
problems with the current system of cost-benefit analysis and areas of
focus for any potential solution.
background
Before evaluating the current use (or misuse) of cost-benefit
analyses and the need for legislative action, it may be helpful to
briefly review the mandates placed upon all Federal agencies when
issuing regulations. First, under Executive Order 12866, issued by
President Clinton in 1993, when an agency determines that a regulation
is the best method of achieving a regulatory objective it must, among
other things:
(1) ``design its regulations in the most cost-
effective manner to achieve the regulatory objective;''
(2) ``propose or adopt a regulation only upon a
reasoned determination that the benefits of the intended
regulation justify its costs;''
(3) ``identify and assess alternative forms of
regulation and . . . specify performance objectives, rather
than specifying the behavior or manner of compliance that
regulated entities adopt;''
(4) ``tailor its regulations to impose the least
burden on society . . . taking into account . . . the costs of
cumulative regulations.''
In Executive Order 13563, issued on January 18, 2011, President
Obama reaffirmed these regulatory principles under an overarching
instruction to Federal agencies to protect public health and our
environment ``while promoting economic growth, innovation,
competitiveness, and job creation.''
misuse of cost-benefit analyses
Having spent many years looking at the benefits of different
environmental regulations, I agree with the many researchers who
believe that reducing levels of fine particles in the air is the most
important and beneficial thing that the federal government can do in
the environmental arena. The vast majority of the benefits that EPA has
ever achieved under all the federal environmental statutes come from
reducing ambient levels of fine particles, which are often referred to
as PM2.5.
There are two major areas of uncertainty about the benefits of
reducing PM2.5: (1) whether all the different components in PM2.5
should be regulated equally; and (2) whether there are benefits of
reducing such pollution in areas where levels are already low. I
believe that the EPA and other agencies should pay more attention to
addressing these areas of uncertainty, but I will not discuss them
here.
My concern is that, rather than using cost-benefit analysis to
develop the most effective way to reduce PM2.5, some EPA officials have
come to view CBA--and the benefits of reducing PM2.5--as a way to
justify virtually anything that they may want to do. All too often in
recent years, EPA has understood the instruction to issue the ``most''
cost-effective regulation to mean that it may issue ``any'' regulation
where it can show benefits exceeding costs. Unfortunately, this is a
serious misuse of the type of cost-benefit assessment that is required
by Executive Orders 12866 and 13563. Proper CBA should identify the
most effective way to regulate--and not be used simply to justify any
regulation that can be claimed to provide benefits that exceed costs.
a case study: the proposed utility mact
EPA has recently issued a proposed rule to reduce emissions of so-
called ``hazardous air pollutants'' (or HAPs) from coal- and oil-fired
power plants. This rule is generally referred to as the Utility MACT
because it was developed under a section of the Clean Air Act that
calls for EPA to develop standards based on the ``maximum achievable
control technology'' (MACT) that can be used to control HAP emissions
from different type of industrial facilities.
As proposed, the Utility MACT would be the most expensive rule in
EPA history. Some experts believe that EPA has actually understated its
likely costs, but even EPA acknowledges that it would impose costs of
about $11 billion a year on the U.S. economy. Yet EPA has also gone to
great lengths to argue that the benefits of this rule will greatly
exceed the costs. Under the requirements of the two Executive Orders
cited above, EPA prepared a cost-benefit analysis which suggests that
annual benefits will be in the range of $48 to $130 billion. If the
annual costs of the rule are only $11 billion, then ``the benefits of
the proposed [Utility MACT] far outweigh the costs,'' as EPA argues.
The Agency's sole basis for issuing this proposal is a regulatory
determination that then-EPA Administrator Carol Browner made in
December 2000 that it was ``appropriate and necessary'' to regulate
certain HAPs from power plants This determination was based almost
entirely on the Administrator's concern about mercury emissions from
coal-fired power plants. Not surprisingly, the majority of the proposed
rule deals with mercury reduction requirements for coal-fired power
plants.
It stands to reason that the vast majority of benefits claimed by
EPA to justify the proposed rule must be the result of reductions in
mercury emissions. But the Agency's cost-benefit analysis tells a very
different story. According to EPA, the benefits to society of the
mercury-reduction requirements are in the range of $500,000 to a
maximum of $6.1 million in total (i.e. not even annual) benefits. In
other words, in a rule estimated by EPA to cost $11 billion annually,
the maximum total benefit of reducing emissions of mercury--the
emissions of which serve as the primary basis for the rule--is $6.1
million.
EPA asserts, however, that it's proposal is justified based on
cost-benefit analysis because the rule will provide benefits of up to
$130 billion ever year. Yet virtually all these benefits come from
reducing PM2.5.
Although mercury is the Agency's legal justification for the
Utility MACT, EPA argues that it must also regulate non-mercury HAPs
such as certain metals (e.g. nickel, selenium, etc.) emitted in trace
amounts and acid gases (e.g. hydrogen chloride and hydrogen fluoride)
that, according to EPA, do not pose a meaningful risk to public health.
While some health risks from emissions of non-mercury HAPs are
discussed in the proposed rule and the CBA (presumably implying health
benefits from reducing such emissions), EPA does not make any attempt
to evaluate the benefits that will be achieved by reducing these
emissions. What is discussed at some length is that control
technologies for non-mercury HAPs included in the proposed MACT
standard result in reductions of emissions of PM2.5 and SO2. In fact,
EPA's analysis admits that virtually all (i.e. 99+ percent) of the
estimated $42 to $130 billion in annual benefits are due to reductions
in PM 2.5.
Nowhere does EPA explain whether there is a less costly way to
achieve these benefits, which is puzzling because Congress has created
a whole separate program to regulate PM2.5--and it is very different
from the MACT approach that EPA is now proposing. Although EPA is
aggressively implementing the program that Congress created to regulate
PM2.5, this program is much more flexible than the MACT program and
would be a much more cost-effective way of regulating PM2.5 from power
plants.
Why should this matter to the public? I have explained part of the
answer above: EPA is mandated to find the most cost-effective solution
for the regulatory priority (here: controlling mercury emissions from
power plants) How can the Agency possibly conclude that it is a good
deal for society to impose an annual cost of $10.9 billion to achieve
benefits of $6.1 million?
The other reason this type of analysis matters is that EPA has
already controlled emissions of PM2.5 by setting a national ambient air
quality standard (``NAAQS'') under section 108 of the Clean Air Act. In
doing so, EPA has set a level of PM2.5 that it has found to be
sufficient to public health and welfare with an adequate margin of
safety. Areas of the country that already have attained this level of
PM2.5 (i.e., that are in ``attainment'') are presumably therefore
already safe from any health risks; Other areas that have not yet
reached this level (i.e. are in ``non-attainment'') are already
required to implement market-wide reductions in PM2.5 to get into
attainment.
In explaining how it developed the baseline for its benefits
analysis, EPA's RIA states that ``EPA did not consider actions states
may take in the future to implement the existing ozone and PM2.5 NAAQS
standards[.]'' Of course, as it did for the Utility MACT, EPA's
proposed NAAQS for PM2.5 contained an estimated analysis of the
benefits of PM2.5 reductions. By not including these benefits in the
baseline of the Utility MACT, EPA is essentially claiming these same
benefits a second time to justify another regulation. Put a different
way, the only way EPA can possibly claim more benefits from reductions
in PM2.5 is to go beyond the controls it has already put in place under
the PM2.5 NAAQS. Doing so, however, is completely contrary to Congress'
intent to regulate PM2.5 under a different section of the Clean Air Act
and contrary to EPA's own claims that the PM2.5 NAAQS is sufficient to
protect public health and welfare.
using ``friendly'' lawsuits to avoid oversight
Currently, the only check on an agency's use of cost-benefits
principles to make regulatory decisions is the interagency review
process overseen by OIRA, which is part of the White House Office of
Management and Budget (OMB). I have great respect for ORIA officials
and staff, who are seasoned and dedicated economists and analysts with
years of experience analyzing the costs and benefits of innumerable
types of regulations. Unfortunately, OIRA officials are often unable to
perform effective oversight due to factors outside of their control.
EPA's proposed Utility MACT is, once again, a useful illustration.
In April 2009, after being sued by several environmental
organizations for its failure to issue emission standards for HAPs from
power plants, EPA voluntarily agreed to a consent decree. Under this
consent decree, EPA agreed to an extraordinarily ambitious schedule
that almost guarantees that there will not be enough time to do serious
regulatory analysis. The consent decree requires EPA to issue the
proposed Utility MACT by March 16, 2011 (which it has already done) and
then to issue a final rule by November 16, 2011. It is not clear that
the environmental organizations had a valid legal claim that EPA was
required to issue the Utility MACT on any particular schedule, but
there was certainly no legal justification for a schedule like this
one. Some observers have suggested that EPA may have wanted to be
``required'' to issue the rule well in advance of the next presidential
election.
To gather data for the proposed rule, EPA issued an information
collection request (``ICR'') to utility companies in December 2009.
This ICR required these companies to conduct extensive testing and
analysis that cost almost $200 million to produce. This data was not
even available until late 2010, so neither EPA nor any other interested
party had more than four months to review it before the proposed rule
was issued. Putting aside the question of whether four months is an
adequate timeframe in which to perform the required technical and cost-
benefit analyses, EPA only submitted its proposed Utility MACT to OMB
for the regulatory review process on February 19, 2011. Accordingly,
OIRA and OMB officials, as well as officials at other affected
agencies, had a total of thirty days to review, analyze, submit and
resolve comments on the 946-page rule and the 496-page cost-benefit
analysis before EPA was required to publish the proposed rule. It goes
without saying that thirty days to perform the type of careful analysis
and provide the meaningful input intended by the Executive Orders is
beyond the skills of even the most dedicated and hard-working public
officials.
This is just one example (a particularly glaring one, to be sure)
of a consent decree having the effect, if not the intention, of cutting
off meaningful regulatory review. But it highlights the need for
Congress to ensure that agencies cannot make voluntary arrangements
with outside entities which result in an end-run around the regulatory
review process. I urge the Subcommittee to develop a legal, enforceable
mechanism to ensure that there is sufficient time for meaningful
interagency review.
ensuring proper review and analysis of guidance documents
I also recommend that the Subcommittee go beyond just rules and
regulations to require that significant guidance documents are subject
to analysis and interagency review. Informal guidance is a very
important part of the regulatory and compliance process, and it would
be a mistake to do anything that would prevent agencies from developing
guidance that is helpful to outside parties. But some guidance
documents can have major impacts on regulated entities, even though
they are not formally designated as ``rules'' that must go through the
normal rulemaking procedures and interagency review. The Subcommittee
should expand the scope of its inquiry to ensure than such guidance is
analyzed and reviewed like rules that have the same practical effect on
regulated parties as a regulation.
* * * * *
It has been widely accepted for many years that cost-benefit
analysis should play an important role in federal rulemaking. Although
OMB and some other federal agencies have used CBA as an important tool
in regulatory development, this requirement is not always done well.
Congress should build on the work that has been done over the last 30
years to ensure that agency do not avoid or misuse this type of
analysis.
__________
Mr. Gowdy. Thank you, Mr. Holmstead.
Ms. Katzen?
TESTIMONY OF SALLY KATZEN, SENIOR ADVISOR, PODESTA GROUP,
VISITING PROFESSOR, NEW YORK UNIVERSITY SCHOOL OF LAW
Ms. Katzen. Thank you, Mr. Gowdy and Mr. Cohen. I
appreciate the opportunity to appear today.
I think all of the witnesses are in agreement to a point.
We all support the use of economic analysis by regulatory
agencies, and that would include the independent regulatory
commissions, like the FCC and the SEC, the CFTC, and the Fed.
And in my written statement, I provided several paths that
Congress could take if it wishes to pursue this, and I would
like to discuss that further in the question period if you are
interested.
I also think it is wholly appropriate for Congress, using
hearings like this one or other oversight tools, to monitor
agency activity, evaluate current practices, spotlight
deficiencies, and bring public pressure to bear to improve
agency performance, if that is what is called for.
Now, where I disagree with my colleagues is whether
Congress should codify the requirements that exist for the
executive branch agencies, including centralized review, and
provide for judicial review of that process. I think not.
Before regulating, we ask agencies to identify the problem
it intends to address and explain how the proposed regulation
would fix that problem in an efficient and effective way. Those
same questions should be asked before Congress acts. What is
the compelling need to codify pieces or all of the executive
order? The foundational principles have been in effect for over
30 years, endorsed and implemented by Presidents of both
political parties, and recently reaffirmed by President Obama.
And over the years, the benefits of regulations have
consistently exceeded the costs. This was true during the Obama
Administration, during the Bush Administration, during the
Clinton Administration.
I cannot and will not say that all executive branch
agencies do a great job of economic analysis and always
incorporate the results in rule development. While strikingly
better than the IRCs, the record is mixed, which should not
surprise anyone given that agencies have different cultures and
different resources. The latter is important because economic
analysis, at least thoughtful, careful, comprehensive analysis,
is not cost free. It takes time and resources. And the more
significant the proposed regulatory action, the more time and
resources it should consume. Regrettably, some of the very
people who call for more analysis are the first to suggest
straight lining or reducing the agency's budgets.
But even if the agencies were not consistently doing and
using high quality analysis, and that case has not been made,
would legislating pieces or all of the executive order bring
about significant change?
Over the past 30 years, Congress has imposed a series of
analytical requirements on the agencies--the Paper Reduction
Act, Reg Flex Act, NEPA, the Unfunded Mandates Act, just to
name a few--without substantially increasing the funding for
the agencies to carry out the tasks that they were assigned.
So, before adding another requirement, Congress might want to
rationalize the current set of analytical requirements and/or
provide more resources to OIRA to review them. If there is an
implementation problem, Congress should address the source of
that problem directly and not just add another requirement.
Second, executive orders are, after all, orders of the
President, to those who report to him and for whom he is
constitutionally responsible. Those who profess support for the
unitary executive should pause before crossing the separation
of powers line to codify an executive order despite its
universal appeal. And the history of this particular line of
executive orders, from 12291, to 12866, to 13422, to 13653--do
we not love all the numbers--shows that while many of the
concepts are the same from one Administration to the next,
different Presidents choose to emphasize different things--
openness and transparency, market failure as a basis for
regulating, public participation. These differences may be
subtle, but are nonetheless important indicators of
Administration policies and preferences.
Third, if Congress were to codify the analytical
requirements of the EO, it would be amending a host of
previously enacted statutes dating back over half a century. At
this point, it is totally unclear how many statutes and which
ones would be amended, and what the implications of such an
amendment would be, both for the regulated entities and
intended beneficiaries of those statutes.
A number of pieces of legislation are silent on the
question of the role of cost, and others explicitly do not
permit the consideration of cost. For that reason, the
executive order says repeatedly that it will prescribe certain
practices ``to the extent permitted by law.'' However, if you
were to codify the executive order, that would become the law,
and as a result, a proposed regulation, even under a statute
that does not permit the consideration of costs, could not
become effective unless, among other things, the benefits
justify the costs.
Now, Dr. Graham referred to the host of regulations coming
through after 9/11 and was worried that they had not been cost-
benefit analysis. I recall explicitly that one of those was a
DoT rule to reinforce the steel in the cockpit doors. That was
what Congress told DoT to do. It was not just that the
President, for some political reason, wanted to get these
things through. Congress said to do that. Agencies are not free
agents. They have to do what the Congress has told them to do.
Now, you could amend all these acts. You can amend the
Clean Air Act, the OSHA Act, and any other authorizing act. But
I would urge you then to do it directly and not indirectly by
creating decisional criteria.
Lastly, I would like to say that the idea of judicial
review here leaves me in a very difficult position. I am a
lawyer who greatly respects our judicial system, and I am
talking to the Judiciary Committee. I would ask you whether the
Federal courts is really the proper forum for sifting through
cost-benefit analysis and deciding whether or not it has been
properly used in formulating rules. Dr. Graham talked about the
non-quantified aspects. Fairness was one. Justice might be
another. Disparate impacts. How do you have Federal courts
deciding? So, that in addition to having an army of lawyers who
will be battling out whether or not the decisional criteria
here has amended the underlying act, you are going to have
armies of economists who will be doing battle as well. With all
due respect, I do not think that is the way to promote economic
growth and job creation, except perhaps for lawyers or
economists.
With that, I thank you very much for your patience.
[The prepared statement of Ms. Katzen follows:]
__________
Mr. Gowdy. Yes, ma'am. Thank you.
Mr. Furchtgott-Roth, we recognize you for 5 minutes?
TESTIMONY OF HAROLD FURCHTGOTT-ROTH, PRESIDENT, FURCHTGOTT-ROTH
ECONOMIC ENTERPRISES
Mr. Furchtgott-Roth. Thank you, Mr. Gowdy. It is a great
honor for me to be here today.
Mr. Gowdy. I might implore you to turn on the----
Mr. Furchtgott-Roth. I am sorry. Mr. Gowdy, Mr. Cohen, it
is a very great honor for me to be here today before this
Committee. I have to mention to Mr. Cohen that I was born in
Tennessee, and I have noticed the color of your tie today, sir.
Thank you very much.
I am aware of the substantial effort that goes into
preparing a hearing, an effort on the part of the Members and
the staff, and I thank you for those efforts.
I have a written statement that I would like to have
entered into the record.
I am trained as an economist and have spent my entire
career as an economist, both inside and outside of government,
except for three and a half years when I had the honor to serve
as a commissioner on the Federal Communications Commission. I
bring to this panel not only the perspective of an economist,
but also the perspective of an independent agency, one that
falls outside of the scope of executive orders, such as 12866
and 13563. I am not saying that those orders are perfect, but
the value of those orders is all too apparent in agencies not
covered by them, agencies such as the FCC.
The FCC promulgates dozens of rules every year. I regret to
tell you that for not a single one of them can we say with any
certainty that the benefits exceed the costs because they are
never documented.
I can tell you from the perspective of an agency that has
never been under these executive orders that Ms. Katzen
described, there is a lot that is lost. There is a lot of
process that is lost. It is a process that is not there simply
for the purpose of process or for the purpose of providing
paper. Those are processes that are there for the end result,
which is more sensible regulation or rational regulation, and
regulation that not just the government officials, but the
American public can have some sense that the benefits exceed
the costs.
I will summarize my testimony in just a few areas.
The public and our economy benefit substantially from the
careful consideration of costs and benefits of regulation.
Federal agencies have substantial legal and regulatory
requirements, including executive orders, to document their
consideration of the costs and benefits that are proposed in
new regulations, but those do not apply to independent
regulatory agencies. The executive orders are not sufficient,
even in Federal agencies, to ensure recent rulemaking, in part
because they are not always enforced, and because the public
cannot go to the courts to ensure that they are enforced.
I have noticed that the FCC, which has an independent
statutory requirement to review its rules every 2 years and
ensure that they continue to be necessary, that that provision
of law has never been applied. It has been around since the '96
Act, and in the past 15 years I can assure you the commission
has never reviewed its rules even once. And the reason is that
the commission knows that no court is going to compel it to do
so. Without the ability of court review, I have very great
doubts that there will be any enforcement of any statutory
requirement for cost and benefit analysis.
I am quite optimistic that the regulatory decisions that
would be made if Federal agencies, such as the FCC, would
substantially improve if there were requirement to do careful
cost-benefit analyses. The results without it are all too
apparent. I think even this Committee is going to have a
hearing in the coming days on network neutrality. Regardless of
your views of whether those rules were good or bad, the fact
that those rules were promulgated without a cost-benefit
analysis, without some documentation that the commission can
say, the benefits of this rule are greater than the cost, I
think puts the commission in a very weak position. And had the
commission been compelled to go through the type of cost-
benefit analysis that Ms. Katzen described, I think the rules
probably would have been better, and I think that the
commission would have been in a stronger position to defend
those rules to the public.
I know the hour is late, and so in the interest of time, I
will end my comments at this point.
Thank you very much.
[The prepared statement of Mr. Furchtgott-Roth follows:]
Prepared Statement of Harold Furchtgott-Roth, President,
Furchtgott-Roth Economic Enterprises
i. introduction
A. Qualifications
I am president of Furchtgott-Roth Economic Enterprises, an economic
consulting firm in Washington, DC. I was a commissioner of the Federal
Communications Commission from November 1997 through May 2001.
From June 2001 through March of 2003, I was a visiting fellow at
the American Enterprise Institute for Public Policy Research in
Washington, DC. In 2007, I was a senior fellow at the Hudson Institute,
another policy research organization.
I have worked for many years as an economist. From 1995 to 1997, I
was chief economist of the House Committee on Commerce where one of my
responsibilities was to work on regulatory reform issues.
My academic research concerns economics and regulation. I am the
author or coauthor of four books: A Tough Act to Follow?: The
Telecommunications Act of 1996 and the Separation of Powers
(Washington, DC: American Enterprise Institute), 2006; Cable TV:
Regulation or Competition, with R.W. Crandall, (Washington, DC: The
Brookings Institution), 1996; Economics of A Disaster: The Exxon Valdez
Oil Spill, with B.M. Owen, D.A. Argue, G.J. Hurdle, and G.R. Mosteller,
(Westport, Connecticut: Quorum books), 1995; and International Trade in
Computer Software, with S.E. Siwek, (Westport, Connecticut: Quorum
Books), 1993. I received a Ph.D. in economics from Stanford University
and an undergraduate degree in economics from M.I.T.
B. Summary of opinions
Based on my years of experience both in government and in the
private sector, and based on my training as an economist, I find the
following:
The public and our economy would benefit
substantially from the careful consideration of the costs and
benefits of regulations.
Federal agencies have substantial legal and
regulatory requirements, including Executive Orders 12866 and
13563, to document their consideration of the costs and
benefits of proposed and new regulations
The executive orders are not sufficient to ensure
reasoned rulemaking.
The FCC does not effectively document or weigh the
benefits and costs of its rulemakings.
Outside parties that participate in FCC proceedings
do not insist that the agency consider costs and benefits of
regulations because of the lack of judicial review.
FCC regulatory decisions would likely improve with
greater consideration of costs and benefits.
Assigning to a federal agency the responsibility for
reviewing the compliance of all agencies--including independent
agencies--with requirements for cost-benefit analyses could
help standardize practices and give the public a more
predictable standard of analysis.
ii. the public and our economy would benefit substantially from the
careful consideration of the costs and benefits of regulations
Evaluating the costs and benefits of an activity is not an idle
academic exercise. As individuals, as families, as businesses, and as
other organizations, we constantly evaluate activities. We are
reluctant to delegate to others those decisions about which activities
we engage in. We reject those activities whose costs are too high for
the possible benefits. We engage in those whose benefits exceed our
estimate of costs.
We make these cost-benefit analyses with varying degrees of
formality. Individuals and families are informal. We reflect on those
decisions that we make for ourselves as individuals. We may explain to
our families decisions about why we make certain decisions, such as
reducing our driving as gasoline prices increase.
Businesses make decisions supported by documents. Woe be to the
vice president of a company who proposes an investment without
documents explaining the possible returns, examining them in detail,
and reviewing possible alternative investments. Civic organizations do
the same.
A publicly traded company that makes major decisions without
documentation is reckless. A privately held company making such
decisions would have difficulty attracting investors. Investors insist
on some documentation of decisions not because they are obsessed with
process but rather because they are obsessed with results.
Good documentation helps lead to good results. Good documentation
leads to rational decisions-- decisions that can be reviewed and
vetted, decisions that can be replicated if they yield positive
results, and decisions that can be avoided in the future if the results
are negative.
We insist on documentation and rational decision-making with
benefits expected to exceed costs by our private companies and civic
organizations. Yet, in government, we all too often insist on
documenting practically everything except the common-sense requirement
that the benefits of our federal agency decisions should exceed their
costs.
It may well be that many--or hypothetically even all--federal rules
have benefits that exceed their costs. But such a statement today would
be an unverifiable expression of faith rather than verifiable fact. We
cannot possibly know which federal rules have benefits that exceed
their costs because our government agencies too often fail to document
such benefits and costs.
The net result almost certainly is that we have some rules whose
costs exceed their benefits. Perhaps even worse, we cannot identify
those harmful rules and distinguish them from those that are
beneficial.
Bad government regulation harms America. It weakens our economy,
lessens incentives to invest in America, destroys American jobs, and
makes less productive the jobs that remain. It reduces the choices we
have as consumers taking many options away from us and unnecessarily
raising the prices of the choices that remain. It robs us and our
children of the belief that our government is always in the right. We
are a poorer country as a result of harmful regulation, regulation that
we cannot even begin to identify.
This result is not a surprise to the American public. Your
constituents see it every day. We see it in our daily lives in toilets
that do not work well as the result of government regulation. We see it
in manufacturing plants that have gone elsewhere because of government
regulations. We see it in security screening at airports. We see it in
employment rules that ordinary Americans cannot understand.
Ask your constituents about bad federal regulations, and you will
hear an earful. Many if not most Americans have their favorite stories
about a bad federal regulation. Some of the stories don't even pertain
to federal rules--such as automatic dish washing detergents that no
longer work. Washington regulation has become so discredited in the
eyes of many Americans that it is the presumed source of much that ails
America, whether it is the actual culprit or not.
Americans don't understand Washington regulation, and Washington
refuses to explain it. The result is not merely bad regulation that
harms our country but a corrosive mistrust of Washington and our
government in general.
We are a better country than this. America deserves regulation that
is accountable. We can do a much better job, and it begins with having
better documentation of the benefits and costs of each regulation.
Let me describe the value of documented cost-benefit analyses in at
least two different stages in the regulatory process:
1. Notices of proposed rulemaking--One of the most important
aspects of the Notice of Proposed Rulemaking process is to
obtain guidance from the public about how best to craft a rule.
A federal agency should solicit ideas from the public first
rather than develop a predetermined rule before seeking public
comment. An agency that can articulate in detail the possible
costs and benefits to various segments of our economy of each
proposed rule and alternatives to it demonstrates some
thoughtful analysis behind the proposed rule. And the agency
can explain other forms of the rule, including no new rule,
that can be considered. Part of the reason to make these cost-
benefit analyses public at the NPRM stage is to enable the
public to vet the analyses. Can the analyses withstand public
scrutiny? Are they internally consistent? Do the numbers make
sense? Here is what the federal agency identifies as the likely
benefits and costs of the regulation. Here is what federal
agency identifies as the likely distribution of those benefits
and costs.
2. Final rules--After it has received comments on the
reasonableness of the cost-benefit analyses for a proposed
rule, an agency can modify not only the proposed rule but
modify the cost-benefit analyses as well. The final cost-
benefit analyses should present in some detail the expected
levels and the expected distributions of the expected benefits
and expected costs of the final rule. The final cost-benefit
analyses should review the comments the agency received on the
initial cost-benefit analyses and should explain how and why
the final cost-benefit analyses were modified to accommodate
the comments, or why certain comments were disregarded. As
important, the final costs-benefit analyses should present
milestones that the agency expects the rule to accomplish,
milestones by which the rule can be reviewed in the future. If
the rule is intended to reach goal Y in two years, the agency
should be willing to have the rule evaluated in 2 years based
on whether or not goal Y was in fact reached or not. In much
the same way, a business makes an investment and projects that
it will be cash-flow positive in two years. In two years, the
board and the shareholders can evaluate both whether the
investment met its targets and also whether management had good
business acumen in the past and is worthy of being trusted to
make decisions in the future.
iii. federal agencies have substantial legal and regulatory
requirements, including executive orders 12866 and 13563, to document
their consideration of the costs and benefits of proposed and new
regulations
The processes that I describe above are not academic exercises. The
assessments of costs and benefits for both proposed and final rules are
required by Executive Order 12866. The review is to be comprehensive,
consider all alternatives, including not regulating: ``In deciding
whether and how to regulate, agencies should assess all costs and
benefits of available regulatory alternatives, including the
alternative of not regulating.'' \1\ The objective is to ensure that
benefits not only exceed costs, but that benefits exceed costs by as
much as possible: ``Further, in choosing among alternative regulatory
approaches, agencies should select those approaches that maximize net
benefits (including potential economic, environmental, public health
and safety, and other advantages; distributive impacts; and equity),
unless a statute requires another regulatory approach.'' \2\
---------------------------------------------------------------------------
\1\ Executive Order 12866, Section 1.
\2\ Ibid.
---------------------------------------------------------------------------
Moreover, the Executive Orders instruct federal agencies to
evaluate not only new rules but existing rules as well. Executive Order
12866 requires agencies to consider whether existing rules may
contribute to a problem that new rules are intended to correct: ``Each
agency shall examine whether existing regulations (or other law) have
created, or contributed to, the problem that a new regulation is
intended to correct and whether those regulations (or other law) should
be modified to achieve the intended goal of regulation more
effectively.'' \3\
---------------------------------------------------------------------------
\3\ Ibid., Section 1 (b) (2).
---------------------------------------------------------------------------
Executive Order 13563 goes further and requires federal agencies to
have periodic reviews of existing ``significant'' rules:
Within 120 days of the date of this order, each agency shall
develop and submit to the Office of Information and Regulatory
Affairs a preliminary plan, consistent with law and its
resources and regulatory priorities, under which the agency
will periodically review its existing significant regulations
to determine whether any such regulations should be modified,
streamlined, expanded, or repealed so as to make the agency's
regulatory program more effective or less burdensome in
achieving the regulatory objectives.\4\
---------------------------------------------------------------------------
\4\ Executive Order 13563, Section 6(b).
Each agency may have additional cost-benefit analysis requirements
under its organic statutes. Section 11 of the Communications Act, for
example, requires the Federal Communications Commission periodically to
review all of its rules every two years and eliminate those that are no
longer necessary.
iv. the executive orders are not sufficient to ensure reasoned
rulemaking
If fully implemented and enforced, Executive Orders 12866 and 13563
would go far towards ensuring reasoned regulation in the federal
government. At least two limitations have prevented the full
implementation of these Orders.
First, as executive orders, these documents are not laws or rules
under which interested parties can seek compliance or enforcement
either through the executive branch agencies themselves or through the
courts.
Second, the Orders apply only to executive branch agencies, not
independent federal agencies. The executive orders do not cover the
Federal Communications Commission, on which I served, and other
independent agencies.
v. the fcc does not effectively document or weigh the benefits and
costs of its rulemakings
While the Executive Orders 12866 and 13563 are insufficient, they
provide a framework for the evaluation of regulation that is entirely
absent at independent agencies. It would help the quality of
regulatory-decision making at the independent agencies to be required
to comply with the executive agencies.
Perhaps partly because it is not covered by the executive orders,
the FCC does not directly weigh or even itemize the benefits and costs
of a particular regulation. The FCC does not systematically consider
alternative forms of regulation including no regulation. The FCC
certainly does not focus on the alternative with the greatest net
benefit. The only presentation of the costs and benefits of a
regulation is an appendix for the Regulatory Flexibility Act. This
appendix is at best an afterthought: a short, rarely read boilerplate
passage that is outside the deliberative process. Sometimes it is
forgotten altogether. I have seen little change in the regulatory
analyses at the FCC since I left the Commission.
I have seen even less attention at the FCC to the biennial review
of all regulations under Section 11 of the Communications Act. After 15
years of Section 11 being in the statute, the FCC has yet to review
meaningfully all of its rules even once. Indeed, many if not most of
its rules have never been formally reviewed at all. Those that have
been reviewed have not documented cost-benefit analyses.
Of course, the FCC, like every other federal agency, implicitly
considers the costs and benefits of proposed and final rules. But the
costs and benefits are rarely if ever formally presented. Rather than
explain exactly how and why benefits would be greater than costs, and
rather than explain the distribution and level of those benefits and
costs, the Commission routinely recites the magic words--``the public
interest''--as if it were possible for rules which plausibly had costs
in excess of benefits to be in the public interest.
vi. outside parties that participate in fcc proceedings do not insist
that the agency consider costs and benefits of regulations because of
the lack of judicial review
The absence of judicial review of the regulatory process means that
both the federal agency and the outside parties do not take the
regulatory process seriously. If Congress were to alter the regulatory
process, it would be important to have mechanisms whereby courts can
review federal agency decisions.
Absent the prospect of meaningful judicial revision, outside
parties that participate in FCC proceedings do not insist that the
agency fully comply with either the Regulatory Flexibility Act or
Section 11 of the Communications Act. Outside parties are reluctant to
invest in an effort that will annoy a federal agency but have little
prospect of a judicial remedy. Consequently, few if any parties bother
to review either the initial and final regulatory flexibility analyses,
much less comment on them.
vii. fcc regulatory decisions would likely improve with greater
consideration of costs and benefits
Careful and thoughtful consideration of costs and benefits of
regulation could substantially improve the regulatory decision-making
process at the Federal Communications Commission. Whether one agrees or
disagrees with the new rules, it is impossible to determine from the
Commission's record whether the benefits of the new rule exceed the
cost. The Commission provided no cost-benefit analysis for the new
rule, nor did it explicitly consider and calculate the benefits and
costs of alternative rules, including no regulation.
The Commission is currently considering a wide range of new rules,
some dealing with compensation among telecommunications companies, some
dealing with spectrum, and still others dealing with the future of the
broadcast industry. None of the proposed rules under consideration has
a meaningful cost-benefit analysis. Nor do the proposed rules have a
range of specific alternatives, including the option of no regulation.
Based on documents that the FCC has provided the public, it is
impossible to determine for each rule what the Commission considers to
be either the range of benefits or the range of costs--and who will pay
for those costs. The public has no basis to comment on whether the
Commission's assessment of benefits and costs of regulation are
accurate because there is no such assessment.
Not infrequently, Congress itself is alerted to new rules at the
Federal Communications Commission that raise public concern. Late last
year, the FCC adopted new rules for network neutrality. The FCC
provided no meaningful assessment of costs and benefits in the final
rules, nor specific consideration of alternative forms of regulation
including no regulation. The FCC has not helped its cause by failing to
provide at various stages of the regulatory process clear statements
about the assessment of benefits and costs of its network neutrality
rules. Had the Commission presented to the public such an assessment of
the costs and benefits of these rules, and had the Commission accepted
and incorporated comments on such an assessment, the Commission would
today be in a much stronger position to defend those rules.
Instead, the Commission is in the weak position of asking Congress
and the public to trust its judgment to regulate sensibly. It cannot
point to a document that lists the benefits and costs of the new rules
and explains in straightforward terms how the benefits and costs were
assessed, who will likely receive the benefits, and who will likely pay
the costs. Nor can the Commission point to such a document that has
been vetted by the public and modified to reflect public comment.
The Commission's neglect of accounting for costs and benefits of
regulation is not limited to network neutrality. The Commission
proposes and promulgates dozens of new rules each year, some more
controversial than others. For none of the rules, controversial or
otherwise, does the Commission prepare a document that either an
economist or an ordinary citizen would consider a full accounting of
the costs and benefits of each of the proposed or new rules.
viii. assigning to a federal agency the responsibility for reviewing
the compliance of all agencies--including independent agencies--with
requirements for cost-benefit analyses could help standardize practices
and give the public a more predictable standard of analysis
It would be useful to designate a federal agency with
responsibility for ensuring the uniform application of cost-benefit
analyses across different agencies so that the public can more easily
interpret agency findings.
__________
Mr. Gowdy. Thank you. I will ask a series of questions, and
then recognize the gentleman from Tennessee.
Mr. Furchtgott-Roth, picking up on what you said toward the
end, why is it that no President to date has included a cost-
benefit analysis in the executive orders for independent
agencies? They could have done so, right?
Mr. Furchtgott-Roth. I believe they could have. I believe
that one of the limitations is that most independent agencies,
certainly when I was at an independent agency, I would have
been reluctant to feel guided by an executive order. And that
is, I think, one of the benefits of having a statutory remedy,
that a statute definitely applies to an independent agency. It
is an open question as to which executive orders apply to
independent agencies. And the string of executive orders on
cost-benefit analysis explicitly do not apply to independent
agencies.
Mr. Gowdy. What do you think the result of a cost-benefit
analysis would be with respect to net neutrality? Walk me
through what that analysis would be like.
Mr. Furchtgott-Roth. The agency would have been required to
at least put on paper what it views as the benefits of the rule
and what it views as the cost of the rule. And it would have
had to explain those benefits and costs.
The commission does not have to do that, and what it does
is it has other statutory requirements. I am not saying that it
does not follow those. It does, but the net result we do not
know because no one has ever, at least the commission has never
done that. And it might have come up with a very different set
of rules had it been required to have that benefit-cost
analysis.
Mr. Gowdy. Mr. Holmstead, toward the end of your testimony,
you made a reference to friendly lawsuits allowing folks to
skirt oversight. Can you give an example of that or extrapolate
on that some?
Mr. Holmstead. There are a couple of recent examples where
an environmental group brings a lawsuit trying to argue that
EPA should have issued a regulation. In at least two recent
cases, it is far from clear whether EPA did have that
obligation, if anybody had been kind of litigating that
straight up, that the environmental groups did not really have
much of a case. Notwithstanding that fact, EPA entered into a
consent decree in one case to issue something called new source
performance standards to reduce greenhouses gases from coal-
fired power plants and from refineries, which had been a big
target of regulation. There is no legal basis for that suit,
especially to get them to issue the greenhouse gases.
Notwithstanding that fact, they entered into a consent decree.
They went to the court to get that consent decree blessed, and
the consent decree includes a schedule which is extremely
aggressive. And as a result, because the consent decree has a
date that has to be met by court order, OMB might get 2 weeks
to review a rule that is going to cost several billion dollars.
And it completely prevents the kind of normal interaction and
analysis that would go on.
And I could give you a number of examples for the record,
but they are, you know, allies of the agencies that enter into
these lawsuits and certainly have the results, if not the
intention, of avoiding regulatory oversight.
Mr. Gowdy. Are there instances where you can cite agencies
double counting the benefits, single counting the cost?
Mr. Holmstead. And, again, I keep coming back to the
Utility MACT Rule because it is a particularly egregious
example. The heart of the Clean Air Act is designed to force
states to regulate, to meet these standards. And so, there are
regulations on the books today that require states to reduce
flying particles. And now, EPA has done this Mercury MACT Rule,
which is supposed to be about mercury, but EPA says, well, we
are going to get all these benefits from flight particles. And
they take credit, again, for benefits that they are taking for
in this other regulatory program. So, that may be not a very
good way of explaining, but, yes, there are cases where EPA
does double count the benefits in justifying different rules.
Mr. Gowdy. Ms. Katzen, Cass Sunstein, I believe, I know he
wrote a book on judicial review. I think he was a law professor
and now currently with the current Administration. If my
research is correct, he supports an executive order that allows
judicial review?
Ms. Katzen. I would be reluctant to speak for him now. But
I would say----
Mr. Gowdy. I was going to ask you for yourself on whether
or not you think that is a good idea.
Ms. Katzen. No. I mean, I will speak to it, and, no, I
think it is a very bad idea. During the Clinton administration
and during the Bush administration, George W. Bush
administration, there were attempts to provide for judicial
review of those processes. And in both instances, both the
Democratic and the Republican administrations, took the
position that it would not be productive. As I said, it is a
question of where is the proper forum to have that kind of
analysis reviewed. There are issues whether, it be forum
shopping to find the right court that will stop something or
other issues. It is another level as part of the process.
But judicial review does exist. If there are problems with
the regulation, it will be challenged in court. And one of the
basic tenants of administrative law is that it has to pass the
arbitrary and capricious standard. It has to have substantial
evidence. That material is in the record. But to have an
additional clause that goes to the cost-benefit study and
whether the benefits justify the costs, when you have part of
the benefits being qualitative, not quantitative, I find it
just mind blowing. And I have been practicing law for over 40
years. To ask a Federal judge to go through that, it strikes me
as being really quite an extension.
If I may, Mr. Gowdy, I would like to answer your very first
question because----
Mr. Gowdy. I will ask permission from Mr. Cohen because I
am 2 minutes over my time limit. So, I will----
Mr. Cohen. Permission not granted.
Mr. Gowdy. Permission not granted, so I am going to
recognize the gentleman from the great state of Tennessee, Mr.
Cohen?
Mr. Cohen. Thank you. Ms. Katzen, answer the first
question?
Ms. Katzen. President Reagan was the first one to write the
executive order. His advisers asked the Office of Legal Counsel
at the Department of Justice whether the President had the
authority to extend the economic requirements and centralized
review to the independent regulatory commissions. He was told
yes. He declined to do so for political reasons, not legal
reasons. He declined to do so because he did not want to offend
Congress.
When we drafted the executive order for President Clinton
in 1993, we went back to OLC. We asked them the exact same
question. They gave us the same answer. They said, yes, he has
the authority to do it. The President chose not to extend it
for political reasons, not legal reasons. He did not want to
offend Congress.
It is for that reason that in my written testimony I give
you several routes that you could take to achieve this, whether
it be a sense of the Congress that the President could do it,
or you self-designate an entity. It is there. It is possible.
Mr. Cohen. Well, if Congress did it, little chance of
offending Congress.
Ms. Katzen. If Congress did it for the IRCs, there would be
little chance of offending Congress, particularly if the entity
was who was going to review it was OIRA.
Mr. Cohen. Let me ask you this. It does seem a bit, Ms.
Katzen, in your testimony, and then, gentleman, if you all
would like to add your comments. If you give the courts the
right to make these decisions on the cost-benefits analysis, I
do not know what their standard would be and how they would do
it. And since of it is qualitative, are you not letting the
courts then legislate and take value judgments that they have
and make them law? And is that not somewhat antithetical to
kind of the idea that you are supposed to interpret the law and
not make the law?
Mr. Holmstead. Can I answer?
Ms. Katzen. Well----
Mr. Cohen. Please, Mr. Holmstead?
Mr. Holmstead. We are not asking courts to make those
judgments. As I understand it, we are asking them to review
whether the agency made a good faith effort to do that. That is
a much easier inquiry for the courts than many of the things
that they view today. I mean, if you look at the statutory
provisions that judges deal with under the Clean Air Act, under
the Clean Water Act, under the FCC, all sorts of things, there
are much more complicated questions than whether the agency
made a showing that the benefits justify the costs.
So, I do not think it is a meaningful change. What I do
think, though, is that agencies would take the requirement much
more seriously if it were enforceable. So, it seems odd to me
to say, well, we believe in these principles; we just do not
want them to be enforced.
Ms. Cohen. Ms. Katzen?
Ms. Katzen. If you read Dr. Graham's testimony, he says
that judicial review should extend to whether the agency has
followed the guidelines set out by OMB in Circular A-4. I
invite you, if you have insomnia, to read Circular A-4. It is
50 pages single spaced of alternative ways of calculating
everything under the sun and throughout it says, ``where
appropriate,'' ``where appropriate, where appropriate.''
Mr. Holmstead sas the inquiry is did they do it? I have not
heard good faith. Has the agency met the requirements? Do the
benefits justify the costs? Has the agency chosen the
alternative that maximizes net social benefits? Those are
result questions, not process questions.
Mr. Cohen. And that seems like, as I said--Mr. Furchtgott-
Roth, if you would like to comment. It just seems to me that it
does give a lot of discretion to the judge to make policy,
which the Congress should be doing?
Mr. Furchtgott-Roth. Mr. Cohen, the FCC is challenged in
court on its rules on a routine basis. Many of those challenges
have to do with compliance with the APA. Was there adequate
public notice? Did the findings reflect the comments that were
provided to the agency?
The commission candidly has a very poor track record in
court. The courts deal with that agency all the time, and I do
not think it is the case that the courts necessarily get
involved in legislating as you described it. A lot of times
they simply say, you know, this is not in your statutory
authority to make this judgment.
I think right now, parties can and do go to courts on
everything from they did not provide adequate notice in the
NPRM, they did not do this, they did not do that. But if
someone came to a court and said, this agency did not put on
paper that the benefits of the rule exceeded the cost, the
court would say, well, you know, they are not required to.
Candidly, as a citizen, I find that result to be so
profoundly disturbing for a government that requires agencies
to document practically everything under the sun, but to say
they are not required to demonstrate to the American public
that the benefits of a rule are greater than the cost, I do not
get it.
Mr. Cohen. Well, I have a plethora of additional questions,
but my time has expired. I yield back to the Chair.
Mr. Gowdy. I am sure Mr. Cohen joins me in expressing the
frustration of having such a distinguished and learned panel
fall on an afternoon where our vote schedule impacted your
schedule and our ability to have this hearing in a timely
fashion. So, it was a treat to hear from each of you. I
compliment you on your acumen, your professionalism, and,
frankly, your civility toward one another.
Without objection, all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses, which we will forward and ask the witnesses to
respond as promptly as they can so their answers may be made
pat of the record.
With that, again, my apologies to all for disrupting more
of your afternoon than we were originally planning on doing.
And we thank you.
[Whereupon, at 6:02 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Response to Post-Hearing Questions from John D. Graham, Ph.D.,
Dean of the School of Public and Environmental Affairs, Indiana
University
Response to Post-Hearing Questions from Jeffrey Holmstead, Partner,
Bracewell & Giuliani, LLP
Response to Post-Hearing Questions from Sally Katzen, Senior Advisor,
Podesta Group, Visiting Professor, New York University School of Law
Response to Post-Hearing Questions from Harold Furchtgott-Roth,
President, Furchtgott-Roth Economic Enterprises