[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 113-87
REDUCING UNNECESSARY AND COSTLY RED TAPE THROUGH SMARTER REGULATION
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HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JUNE 26, 2013
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Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Kevin Brady, Texas, Chairman Amy Klobuchar, Minnesota, Vice
John Campbell, California Chair
Sean P. Duffy, Wisconsin Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan Mark R. Warner, Virginia
Erik Paulsen, Minnesota Bernard Sanders, Vermont
Richard L. Hanna, New York Christopher Murphy, Connecticut
Carolyn B. Maloney, New York Martin Heinrich, New Mexico
Loretta Sanchez, California Dan Coats, Indiana
Elijah E. Cummings, Maryland Mike Lee, Utah
John Delaney, Maryland Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania
Robert P. O'Quinn, Executive Director
Niles Godes, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Kevin Brady, Chairman, a U.S. Representative from Texas..... 1
Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota.... 3
Witnesses
Professor Susan Dudley, Director, Regulatory Studies, The George
Washington University, Washington, DC.......................... 6
Dr. Michael Greenstone, 3M Professor of Environmental Economics,
Massachusetts Institute of Technology, Director of the Hamilton
Project and a Senior Fellow at the Brookings Institution,
Cambridge, MA, and Washington, DC.............................. 8
Dr. Jerry Ellig, Senior Research Fellow, Mercatus Center, George
Mason University, Arlington, VA................................ 10
Dr. Robert Kieval, Executive Vice President and Chief Technology
Officer, CVRx, Inc., Minneapolis, MN........................... 12
Submissions for the Record
Prepared statement of Chairman Brady............................. 30
Prepared statement of Professor Susan Dudley..................... 32
Prepared statement of Dr. Michael Greenstone..................... 47
Prepared statement of Dr. Jerry Ellig............................ 51
Prepared statement of Dr. Robert Kieval.......................... 84
REDUCING UNNECESSARY AND COSTLY RED TAPE THROUGH SMARTER REGULATION
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WEDNESDAY, JUNE 26, 2013
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 9:55 a.m. in Room
G-50 of the Dirksen Senate Office Building, the Honorable Kevin
Brady, Chairman, presiding.
Representatives present: Brady, Paulsen, Hanna, Maloney,
and Delaney.
Senators present: Klobuchar, Murphy, Coats, and Toomey.
Staff present: Gabriel Adler, Ted Boll, Hank Butler,
Colleen Healy, Conor Carroll, Gail Cohen, Connie Foster, Niles
Godes, Patrick Miller, and Robert O'Quinn.
OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S.
REPRESENTATIVE FROM TEXAS
Chairman Brady. Good morning, everyone. We are going to do
something unusual and start ahead of time. So we will see if
that works in Washington.
This month the current recovery celebrates its fourth
anniversary. Now is a good time to assess how the U.S. economy
is performing.
Unfortunately, for American families the current recovery
remains the weakest since World War II. There is a troubling
Growth Gap in economic performance between this recovery and
the average of post-war recoveries, leaving our economy 4
million private sector jobs short and $1.2 trillion missing
from the economy. While Wall Street is booming, every man,
woman, and child in America is missing nearly $3,000 in real
disposable income due to the Growth Gap.
During this Congress, the Joint Economic Committee has been
examining the causes of the Growth Gap and the types of
alternative policies to close that gap. The Joint Economic
Committee has studied how current fiscal and monetary policies
have held back this recovery. Today, the JEC will explore
regulatory policy.
From town hall meetings with my constituents in Texas, to
conversations with business leaders and economists across
America, there is one consistent message: Uncertainty over the
costs of new regulations in healthcare, the environment, labor
issues, and financial services is suppressing business
investment and the creation of new jobs along Main Street.
The burden of federal regulations is large. At year-end
2012, the Code of Federal Regulations had 238 volumes and
174,000 pages.
That burden is growing. In 2012, the Federal Register--
which publishes proposed new rules and regulations, final
rules, and changes to existing regulations--totalled 78,961
pages. Three of the four highest page counts since the Federal
Register began publication have occurred during the current
presidency.
And that burden is costly. NERA Economic Consulting, in a
study last year commissioned by Manufacturers Alliance for
Productivity and Innovation, estimates the current direct cost
of compliance with ``major'' regulations--that is, those with
an estimated cost greater than $100 million a year--issued
between 1993 and 2011 to be between $265 billion and $726
billion every year. Clyde Wayne Crews of the Competitive
Enterprise Institute estimates the total cost of regulation in
America approaches $1.8 trillion annually, or nearly 12 percent
of our Nation's economy.
Given this historically weak recovery, the rise of
technology to help us meet regulatory goals more cheaply, and a
shared belief that America should continue progress on a clean
environment and safe workplace, when regulations are necessary
doesn't the public deserve the most effective regulation at the
least cost?
Smart regulations that improve the market process and its
incentive structure to accelerate progress rather than dictate
particular outcomes will prove superior to tens of thousands of
pages of mandated rules and micro-managed instructions.
Devising process-enhancing rules that engage the private
sector's versatility and creativity requires objective upfront
analysis and thoughtful design.
Yet federal agencies often do things the other way around:
deciding first what they want to do, and then using whatever
analysis is performed to justify their preconceived
``solution.'' This abuse must stop.
In 1981, President Reagan issued an Executive Order
requiring Executive Branch agencies to conduct Regulatory
Impact Analysis, commonly known as cost-benefit analysis,
before issuing major new regulations. This first step toward
smarter regulation had its limitations.
An executive order affects only Executive Branch regulatory
agencies and therefore does not affect independent regulatory
agencies such as the Consumer Product Safety Commission, the
Federal Trade Commission, the Federal Reserve, and the Consumer
Financial Protection Board.
Over the years, Congress has exempted broad swaths of
federal regulation from the scrutiny of cost-benefit analysis
through provisions of the Clean Air Act, for example. While
there are government-wide ``best practice'' standards on how
agencies should conduct cost-benefit analysis, they are not
uniformly applied and are not legally binding. So the quality
of agency cost-benefit analyses varies greatly.
Agency bureaucrats, as you would imagine, are naturally
biased toward their proposed regulation and have learned how to
manipulate cost-benefit analysis to justify whatever new
regulations they wish to issue.
For example, former Administrator of the Office of
Information and Regulatory Affairs, Professor John Graham,
closely examined CAFE, the Corporate Average Fuel Economy
standards for trucks in his testimony before the House
Committee on Oversight and Government Reform in September 2011
and found that to inflate the benefits of their new rule
regulators had cut the discount rate and the so-called
``rebound effect'' of increased driving with better mileage to
half or less. He also found that they failed to carefully
consider the rule's effects on vehicle size, performance, and
safety.
In other words, today too few proposed rules are fully
analyzed. There are too many loopholes, no uniform requirement
across all agencies, a lack of standards with which to conduct
the analysis, no check-and-balance against agency bias, no
comparison of past analysis to real-life impacts, and little
recognition of the total burdens on the economy of regulation.
We must do better. The purpose of this hearing is to
discover ways in which Congress can make the regulatory process
``smarter,'' more cost-effective, and better designed to
accomplish the goals without damaging the economy.
In particular, the Committee hopes to hear from today's
witnesses about the deficiencies in cost-benefit analysis as it
is now practiced, and how agencies can do a better job of
quantifying and measuring the costs and the benefits of both
proposed and existing regulations.
I look forward to the testimonies, and I recognize our Vice
Chair, Senator Klobuchar, for her opening remarks.
[The prepared statement of Chairman Brady appears in the
Submissions for the Record on page 30.]
OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S.
SENATOR FROM MINNESOTA
Vice Chair Klobuchar. Well thank you very much, Mr.
Chairman, and thank you for holding this hearing, and thank you
to all the witnesses.
I particularly wanted to recognize two witnesses I invited,
Dr. Greenstone and also Dr. Kieval, who heads up a company in
Minnesota, CVRx, Inc., which is a medical device company. And I
know that Representative Paulsen welcomes him, as well, as we
both have done a lot of work--Representative Paulsen and
myself--in the area of medical device regulation to make things
a little easier, and also trying to get the medical device tax
repealed.
This hearing is especially important to me because, before
coming to the U.S. Senate I spent 13 years representing
companies in regulatory areas, doing everything from trying to
get competitive telecom carriers into the telecommunications
local market, to helping Dairy Queen get their 2-for-1 Sundae
deal approved in every state in the Union.
I know you're curious about which the last state was that
was willing to approve it. That would be Louisiana, not really
a surprise.
Americans expect and deserve a common-sense approach to
regulation, one that protects consumers and the public
interest, without stifling innovation and economic growth. And
this means doing sensible things that advance technology and
global competitiveness, while also maintaining safety and
security standards. And that is the way I look at this.
At the same time, I would agree with the Chairman that we
should be open to change. I believe we need to be a country
that makes stuff again, invents things, exports to the world,
and for that we need a competitive agenda. Which means building
our work skills. Which means building on exports. Which means
reducing our debt in a balanced way. Doing comprehensive tax
reform. Bringing down that business tax rate, and paying for it
by closing loopholes and other things.
But this also means cutting down on red tape. One example
that we will talk about today is medical device. My State has a
long history of leadership in medical device manufacturing. The
story of Earl Bakken tinkering around in his garage and
launching Medtronic is the stuff of legends, but it is not just
big companies like Medtronic that keep this industry running.
It is the small- and medium-sized medical tech companies.
I recently visited one that actually got its start in a
chickencoop. The U.S. is the largest net exporter of medical
devices in the world, enjoying a trade surplus of $5 billion a
year. Yet we've seen a decline in venture capital funding
largely due to delays in the approval process.
According to one study, venture capital investment in the
medical device and equipment industry fell 20 percent from the
first quarter of 2012 to the first quarter of 2013.
It is critical that we prevent regulatory burdens from
interfering with the delivery of life-saving products. We
recently passed MDFA/PDFA bills out of this Congress, signed
into law, that contain some really good things, including bills
that I introduced and Representative Paulsen and others worked
on, the agency's least-burdensome principles, which have been
continuously ignored by the FDA reviewers, improving the
conflict-of-interest provisions making it easier for the FDA to
recruit top-line experts to take part in the review process,
and requiring the FDA to use an independent contractor to
assess the management processes.
This is just one example. Another that I've worked on a lot
is tourism. And I personally believe that one way we can do
this, in addition to looking at some of the cost/benefit
analysis, is looking industry by industry and figuring out what
are things that we can do that we could actually get through
Congress, or that the Administration could do on its own
without Congress, to reduce some of these regulatory burdens
and make things work for today.
One of my best examples is tourism. Since 9/11, through two
Administrations, we lost 16 percent of the international
tourism market. Every point that we gained back is 161,000
jobs. A lot of that had to do with slowdown of the approval of
the visa process.
Senator Blunt and I worked on this together. We have seen
dramatic changes in China now. We were unable to compete with
Chinese wanting to go to England. We are now in the game,
competing in terms of the wait times for those visas.
Brazil is down to two days in several cities. That is
simply because we move people around, realizing this was a
profit center for our government, and did this without
legislation.
Now we also can do more things legislatively with visa
waivers. That is why I am so excited in part about the
immigration bill. There are some really good things in there,
like the JOLT Act that will help with that. And Senator Blunt
and I, along with Representative Walz, passed last December the
no-hassle flying act, which was about not doing double
screening of luggage. As minor as it might sound, it makes a
huge difference when you're on the Canadian Border in Minnesota
when you have airports that are already up to our standards for
screening.
Exports are another example. As we see the defense industry
being hit by sequestration and other things, and some reduction
in our work overseas, we have to try to keep those jobs in
America. And part of this is going to be having to look at the
export rules and make the defense export system more efficient
by creating a unified list of restrictive items at one agency,
rather than having lists at multiple agencies.
This will help defense subcontractors and other businesses
that make parts that are used in military equipment but are not
exclusively military products. So we have to look at this
export control list and make it work better.
Agriculture is something we care a lot about in our State.
We have seen a number of rules from the EPA that have come out,
and then later been rejected, whether it's milk spills being
regulated as oil spills, or other things, where I think we can
be smarter about how we do that.
I actually had a bill that I had with Senator Lugar that I
will be introducing again to try to get people with agriculture
backgrounds on the EPA rulemaking group so that we can try to
get that interest represented and stop things from happening
that do not make sense.
The Chairman mentioned the tax issues. I truly believe that
we need comprehensive tax reform. After immigration, I would
love it if that was the next issue that we went to, in addition
to trying to work out a bipartisan agreement. Our Tax Code, as
we all know, is too complicated. And while we have made some
inroads like repealing the 1099 reporting requirement, I think
there's others we can do.
That being said, we have to remember our economy is stable.
We have seen improvements. In Minnesota we're down to 5.3
percent unemployment. And so I want to keep on that road, not
doing anything to interfere with safety or security but look at
this red tape as part of the solution to improving even more.
Thank you, Mr. Chairman.
Chairman Brady. We have a terrific panel of witnesses
today. I appreciate each of you being here today and look
forward to your testimony. Let me introduce each of them.
Ms. Dudley, Professor Dudley, directs the George Washington
University's Regulatory Studies Center, which she founded in
2009 to focus on high-quality research in regulatory policy.
She has previously served as Administrator of the Office of
Information and Regulatory Affairs of the U.S. Office of
Management and Budget. She has also directed and taught the
Regulatory Studies Program at the Mercatus Center at George
Mason. She holds a Master's Degree from MIT's Sloan School of
Management, and a Bachelor's Degree in Resource Economics from
the University of Massachusetts at Amherst.
Mr. Greenstone, Dr. Greenstone, is the 3M Professor of
Environmental Economics in the Department of Economics at MIT.
He is on the MIT Energy Initiatives Council, and on their
Environmental Research Council. He also serves as a Senior
Fellow at the Brookings Institution, and a Research Associate
at the National Bureau of Economic Research. Previously he
served as the Chief Economist for President Obama's Council of
Economic Advisors. He holds a Ph.D. in Economics from
Princeton, and a B.A. in Economics from Swarthmore College.
Welcome, Doctor.
Dr. Ellig is a Senior Research Fellow at the Mercatus
Center at George Mason University, as well, focusing on the
federal regulatory process, economic regulation, and
telecommunications regulation. Previously he served as Deputy
Director and Acting Director of the Office of Policy Planning
at the Federal Trade Commission, and has also served as a
senior economist for this Committee. Welcome. Dr. Ellig
received his Doctorate and Masters in Economics from George
Mason, and his B.A. in Economics from Xavier University.
Dr. Kieval is founder and Chief Technology Officer of CVRx,
a private medical device company located in Minnesota whose
State has currently taken over the Joint Economic Committee.
[Laughter.]
He is over--much to my dismay--he has over 16 years of
medical device industry experience, including being named
Innovator of The Year by Twin Cities Finance and Commerce. He
currently serves on the board of the Medical Device
Manufacturers Association. He completed his undergraduate and
graduate training at the University of Pennsylvania, where he
received Doctorate Degrees in Veterinary Medicine and in
Psychology.
Welcome to each of the panelists today. I think this is a
very important topic, and certainly our businesses large and
small have raised regulatory concerns as their number one and
number two concerns about their ability to hire.
So just a nuts and bolts discussion on how we can achieve
our regulatory goals in a smarter, cheaper, more cost-effective
way by doing analysis up front is really critical.
So, Professor Dudley, we have reserved five minutes for
your oral remarks. Your statement will be made a part of the
record. Please go ahead. Can you get that mic?
STATEMENT OF PROFESSOR SUSAN DUDLEY, DIRECTOR, REGULATORY
STUDIES CENTER, THE GEORGE WASHINGTON UNIVERSITY, WASHINGTON,
DC
Professor Dudley. Thank you, Chairman Brady, and Vice Chair
Klobuchar. I really enjoyed your opening statements, and I am
pleased that the Committee is holding this hearing.
I would like to talk about the importance of Regulatory
Impact Analysis, but also the need for institutional change to
provide better incentives for ensuring better regulatory
outcomes.
While Regulatory Impact Analysis is widely accepted by
practitioners and academics, and every modern President has
endorsed its use, too many regulations are still being issued
without meaningful analysis of the likely consequences of
alternative actions. And you mentioned this in your opening
remarks, Chairman Brady.
First, many statutes preclude agencies from considering
important tradeoffs when developing regulations. Now fixing
that problem would likely require amending language in existing
statutes, but also ensuring that new legislation requires
agencies to weigh regulatory effects and provides them with
adequate time to do the research, to deliberate, and to consult
with the public before they issue new regulations.
The other constraint, as you mentioned, is that independent
regulatory agencies have not been subject to executive
oversight, and they have been less than rigorous in their
analysis.
Now Senator Warner, who is a member of this Committee, has
proposed legislation, co-sponsored with Senators Portman and
Collins, that would subject independent agencies to regulatory
analysis and oversight. And I think that is important.
But even when it is conducted, regulatory analysis is not
the silver bullet guaranteeing smarter regulation, as you both
mentioned. Ex ante analysis necessarily rests on hypotheses of
how regulatory action will alter outcomes and what it will
cost.
So even the most carefully analyzed regulations may result
in unanticipated changes in behavior that undermine their
desired effects.
Compounding this problem is--and I feel like I'm saying
everything that you said--is that agencies have strong
incentives to demonstrate that their desired regulations will
have benefits that exceed their costs.
Regulatory impact analyses are often done after the
decision is made to justify, rather than to inform, the
decision.
Agency staff are smart and motivated, but like everyone
else they are susceptible to the confirmation bias. And their
single-mission focus often leads them to discount data,
research, values, and perspectives that do not support their
preferred regulatory alternative.
Institutional changes that provide more effective checks
and balances and engage the wisdom of crowds are needed to
counter these natural incentives. Judicial oversight provides
an important Constitutional check, but courts defer to agency
expertise when evaluating regulatory records and requirements,
and Presidential Executive Orders are not enforceable by law.
There are some promising legislative initiatives that would
make Regulatory Impact Analysis judicially reviewable, and
others that would alter the deference that courts give to
agencies.
Congress could also provide more checks and balances by
voting on new regulations before they're issued. It could also
assign responsibility for evaluating regulatory bills and
regulations to a Congressional office.
Just as the CBO provides independent estimates of the on-
budget cost of legislation and federal programs, a staff of
Congressional regulatory experts could provide Congress and the
public independent analysis regarding the likely off-budget
effects of legislation and regulation.
And then the American public can provide checks and
balances, too. Recognizing that not all problems require a
regulatory solution is an important first step. Requiring
earlier disclosure of key information could also engage broad
public input, long before any policy decisions are formed and
could bring greater transparency to the rationale behind
regulatory decisions.
Regulations also lack accountability because once they're
in place agencies seldom look back to evaluate whether they are
having their intended effects.
Initiatives to require ex poste evaluation of regulations
have met with limited success largely because they did not
change the underlying incentives.
Two ideas that have the potential to impose needed
discipline on regulatory agencies, and to generate a
constructive debate on the real impacts of regulation, are a
regulatory improvement commission that operates like the BRAC,
and a policy similar to the UK's one-in-one-out approach that
requires agencies to make trade-offs when issuing new
regulations.
So in closing, Regulatory Impact Analysis is a longstanding
and important element of U.S. regulatory policy, but a variety
of institutional obstacles prevent it from being a silver
bullet for producing smarter regulation.
Greater Congressional oversight, judicial oversight, and
opportunities for public involvement could provide better
accountability and improve the reasoning underlying regulatory
decisions, as well as the decisions themselves.
[The prepared statement of Professor Susan Dudley appears
in the Submissions for the Record on page 32.]
Chairman Brady. Thank you, Professor. And don't worry about
agreeing with Senator Klobuchar and I. It rarely happens. We're
glad to hear that happened.
[Laughter.]
So, Dr. Greenstone.
STATEMENT OF DR. MICHAEL GREENSTONE, DIRECTOR, HAMILTON
PROJECT, 3M PROFESSOR OF ECONOMICS, MASSACHUSETTS INSTITUTE OF
TECHNOLOGY, WASHINGTON, DC, AND CAMBRIDGE, MA
Dr. Greenstone. Thank you, Chairman Brady, Vice Chair
Klobuchar, and Members of the Joint Economic Committee, for
inviting me to speak today about opportunities to improve the
government's regulatory system.
American government, as all of you know, at every level
regulates a broad array of social and economic life. Regulatory
policy determines the air we breathe, the quality of the water
we drink, the safety of our workplaces, the investments we
make, and so much more.
Government regulates these activities because, in cases of
market failure, for example, our free market system does not
create the necessary incentives for businesses and individuals
to protect the public good.
The challenge for regulators is to consistently set rules
with benefits that exceed their costs, or otherwise achieve
their statutory objectives. However, an important weakness in
our regulatory system is that we generally don't have the
information to make these judgments over the long haul.
This is because our evaluations are done before the
regulations are enacted, and are almost entirely based on a
regulation's likely benefits and likely costs. Of course this
is the point when we know the absolute least, precisely because
the regulations are untested.
Once a regulation passes this ex ante test, it goes on the
books and generally stays there unexamined for years, and in
many cases decades. In practice, some regulations work out
exactly as intended, but others do not.
For example, an air pollutant may prove to be more harmful
than was originally understood; or innovation may lead to new
and less expensive pollution abatement technology.
President Obama's Executive Orders 13563 and 13610 spell
out what I think is a potentially revolutionary step forward in
regulatory policy. Specifically, they require that agencies
routinely revisit the measurement of costs and benefits of
existing regulations, and identify the least costly ways to
achieve a regulation's goals.
In the remainder of my testimony I am going to identify two
further changes that I think would increase the chances that
our regulatory system consistently produces rules with benefits
that exceed costs.
The first change is to make three reforms that build on the
President's recent Executive Orders.
First, I recommend institutionalizing the retrospective
review of economically significant rules so that these reviews
are automatic. Depending on the particulars of the rules, the
reviews should be completed within a prespecified period--say 5
to 10 years.
In addition, the relevant agency would be required to
prespecify the expected benefits--for example, reduced child
mortality rates--and expected costs: say reduced business
profits, so that the terms of the subsequent review would be
known in advance and could not be changed later.
Second, the relevant agency should commit to undertaking a
new rulemaking when the results from the retrospective analysis
differ from the benefits and costs that were expected prior to
the regulation's implementation. The new rulemaking should also
operate under a time limit.
Third, these efforts would be strengthened if they were
accompanied by triggers to ensure that they are undertaken
within a prescribed time period. One approach would be for
agencies to post on their website the deadline for a rule's
review and reconsideration. A stronger approach would be to
enable the Judiciary to compel reviews and new rulemakings in
cases where an agency has failed to comply with the review
timeline, or to act upon its results.
There are some difficulties with this approach I have just
outlined. Many agencies do not have the staff, expertise, or
resources necessary to undertake these reviews.
Further, as Dr. Dudley has pointed out, the process of
self-evaluation is challenging for all organizations as it
requires complete objectivity.
My recommendation is to establish a new, independent body
for regulatory review. This body could be housed within the
Legislative Branch and modeled after the Congressional Budget
Office--or even become a division within the existing CBO.
As you know, before the CBO was established only the
President had a ready source of budgetary and economic data and
analysis. The entire budget process has benefitted from CBO's
existence and its independence.
Budgetary analyses and proposals throughout Washington are
now created to a higher standard, knowing that they must
ultimately face scrutiny by the nonpartisan CBO.
My recommendation would be to place this new organization
in the Legislative Branch and make it avowedly nonpartisan,
just like the CBO. The organization would be charged with
conducting independent regulatory impact evaluations.
Of course the creation of such a body would require
resources. My best estimate is that such an organization could
be funded for less than $15 to $20 million annually. This is a
modest amount of money when compared to the hundreds of
billions of dollars of costs and benefits that regulations
introduce in our economy.
My judgment is that it is very likely that such an office
would pay for itself many times over.
To quickly summarize, I propose two key reforms:
One, institutionalize a process by which agencies
automatically undertake retrospective reviews of regulations,
and initiate a new rulemaking when the results from the
retrospective analysis differ from the expected benefits and
costs.
Two, create a new independent body for rigorous, objective
regulatory review that is modeled on the Congressional Budget
Office.
We live in a rapidly changing economy and need a regulatory
review structure that evolves to meet the new and different
needs of our society. The reforms that I have outlined here
would give policymakers tools for protecting those regulations
with great benefits for our society, reforming those
regulations that impose unnecessary costs, and culling those
that no longer serve their purpose.
That would be good for our well-being and good for the
American economy.
Thank you, once again, for inviting me to participate and I
will gladly respond to any questions.
[The prepared statement of Dr. Michael Greenstone appears
in the Submissions for the Record on page 47.]
Chairman Brady. Great. Thank you, Doctor. Dr. Ellig.
STATEMENT OF DR. JERRY ELLIG, SENIOR RESEARCH FELLOW, MERCATUS
CENTER, GEORGE MASON UNIVERSITY, ARLINGTON, VA
Dr. Ellig. Well, Chairman Brady, Vice Chair Klobuchar,
Members of the Committee, I would like to thank you for the
opportunity to testify here today.
If I could summarize my testimony in a nutshell, it's this:
Regulatory Impact Analysis is critically important for making
sensible regulatory decisions. A lot of times it is not done
very well, or it does not appear to have much of an effect on
decisions, and improvement in that is probably going to require
legislation.
Let me elaborate on each of these three points.
First, why is Regulatory Impact Analysis important? Well
one of my favorite old Calvin & Hobbs cartoons starts with the
little boy, Calvin, holding a water balloon saying,
``I'm going to prove that there is no moral law governing
the universe. I will throw this water balloon at Suzy Dirkens,
unless the universe gives me a sign that that would be wrong in
the next 10 seconds.''
So he counts down. He says, ``Nope, no sign.'' Throws the
water balloon.
She chases him. Beats him up. In the last panel of the
cartoon, he's lying on the ground saying:
``Why does the universe always give you the sign after you
do it?''
[Laughter.]
That is why we need high-quality Regulatory Impact Analysis
to inform regulatory decisions.
We expect regulation to accomplish a lot of really
important things. We expect regulation to protect us from
financial fraud; to keep the air clean; keep the water clean;
in the case of my old agency, the Federal Trade Commission, we
expect regulation to prevent telemarketers from bothering us at
home when we don't want to be bothered. All of those kinds of
good things.
In order to get those good things, we usually have to give
something up. Sometimes it's money. Things cost more. Sometimes
we have to give up privacy. We give up convenience. We give up
dignity. We give up liberty. Regulation tells us what we may
do, what we may not do, and sometimes what we must do.
And if government is going to tell us what we may, may not,
and must do, government has a moral responsibility to
understand the likely consequences of regulation, to understand
the likely consequences of alternatives, and to understand
those things ahead of time before it makes decisions.
And a good Regulatory Impact Analysis provides that kind of
information. Regulatory Impact Analysis is a structured
framework for comparing the potential results of different
courses of action, and it is also a structured framework for
assessing the nature of the problem we're trying to solve so we
can pick a solution that will actually work.
Now Presidents have recognized this. For more than three
decades, Presidents have directed Executive Branch agencies to
conduct Regulatory Impact Analysis for important regulations.
Unfortunately, we find that often Regulatory Impact
Analysis is not done very well, or is not used very much in
decisions. The most recent piece of research that looks at that
is a project at the Mercatus Center that we call ``The
Regulatory Report Card.''
We have a team of economics professors around the country
who evaluate the economically significant regulations. Those
are the ones that have an economic impact above $100 million.
It is kind of a giant exercise in grading papers. We have done
this for--from 2008 to 2012, looking at the quality of the
analysis and the extent to which it is used; evaluating them
based on criteria that are in the Executive Order that governs
regulatory analysis and review.
And the result of this is that over the past five years on
average regulations have earned about half of the available
points that they could earn on our grading scale. For me, 50
percent is about good enough for an ``F.''
The best we have ever seen earns about 80 percent of the
possible points on our grading scale, so that might be a B-.
These results are consistent with what other researchers find
when they have looked at the quality of Regulatory Impact
Analysis and when they have looked at the use of Regulatory
Impact Analysis.
We certainly do find some best practices, and we do find
cases where the analysis seems to have affected decisions, but
those are exceptions rather than the rule.
So how could the U.S. Government improve the use of
Regulatory Impact Analysis? Well the first step toward that is
understanding that no single Administration, and no single
political party, is to blame for this problem.
We looked at regulations in the Bush Administration and the
Obama Administration. On average, there was no difference in
quality. On average, there was no difference in the extent to
which the analysis was used. Other researchers have found the
same thing when they compared the quality of Regulatory Impact
Analysis across Administrations of different parties.
It is not a partisan problem, or a problem with a
particular Administration; it is an institutional problem that
requires institutional solutions.
The most logical obvious institutional solution is a
legislative requirement that all agencies conduct Regulatory
Impact Analysis for regulations of a certain level of
importance combined with Judicial review to ensure that the
analysis meets a certain standard of quality, and that the
agency explained how the analysis affected its decision.
In short, regulation is too important to be based just on
good intentions. We need to actually know what we are doing
before we do it.
[The prepared statement of Dr. Jerry Ellig appears in the
Submissions for the Record on page 51.]
Chairman Brady. Great. Thank you, Dr. Ellig.
Dr. Kieval.
STATEMENT OF DR. ROBERT KIEVAL, EXECUTIVE VICE PRESIDENT AND
CHIEF TECHNOLOGY OFFICER, CVRx, INC., MINNEAPOLIS, MN
Dr. Kieval. Thank you, and good morning.
Chairman Brady. Can you hit that (microphone).
Dr. Kieval. Got it. Good morning, Chairman Brady, Vice
Chair Klobuchar, Members of the Committee. It is an honor to
have this opportunity to address you today. I will focus my
remarks on the impact of regulation on medical technology and
innovation.
As you have heard, I am the founder and Chief Technology
Officer of CVRx, a Minneapolis-based medical device company. I
have worked in the medical technology industry throughout my
entire career, with experience both at a large manufacturer,
and also in the start-up environment.
In addition to serving on the board of the Medical Device
Manufacturers Association here in Washington, I also serve on
the board of our local industry organization, LifeScience Alley
in Minneapolis.
CVRx is now about 11 years old. We remain pre-revenue here
in the United States, and are in early commercialization
outside the U.S.
The U.S. med tech industry supports at least 400,000 jobs,
with nearly 2 million more in adjacent sectors. It is one of
the few American industries that is a net exporter and we are
the global leader.
Small businesses like CVRx, often with fewer than 50
employees, are a vital source of innovation and comprise
approximately 80 percent of the industry. Companies like ours,
with a single product and no alternative revenue streams,
depend on outside investment.
Investors require assurance of a reasonable and predictable
path to product approval. Ambiguous or overly burdensome
approval thresholds can fatally inhibit investment in a company
and prevent development of what could be a very meaningful new
therapy.
Since 2005, the time and capital required by a company to
get a clear determination of its regulatory pathway, to
negotiate clinical trial requirements, and to obtain a product
approval decision have risen dramatically.
The approval process itself has become increasingly
inefficient, inconsistent, and unpredictable. This has led
patients--excuse me, this has led to patients outside the U.S.
frequently getting access to American innovations an average of
two years before American patients do.
In many cases, jobs and R&D have also moved overseas,
weakening our industry's competitiveness.
This is also the case for CVRx. While we work through the
approval process here, our product is treating patients in
Germany, Italy, the Netherlands, Hungary, and Turkey. I just
returned from Europe where I heard from doctors how patients
there are benefitting from our technology. As a result, the
jobs that we are adding are also largely overseas.
The FDA has a crucial mission to protect the public health.
Clearly this means providing reasonable assurance that products
are safe before they are approved. However, it also means that
patients should not be unduly deprived of innovations because
of inefficient or overly burdensome approval processes.
Finally, the medical device tax, a tax on revenues
irrespective of a company's earnings, further increases
financial pressure and compounds these difficulties. For larger
companies, these challenges often represent issues of
profitability; for smaller companies like CVRx, they may be
issues of survivability.
In the first quarter of this year, first-time financings in
the life sciences dropped dramatically to $98 million, the
lowest quarterly amount since 1996. By comparison, in 2007
alone, start-up device companies raised over $700 million in
initial financing. These early stage investments are a clear
leading indicator of future innovations. So this does not bode
well for patients.
Federal regulators and policymakers are working to address
these issues. Our industry appreciates the bipartisan support
for the Food and Drug Administration's Safety and Innovation
Act of 2012. This reauthorized the medical device user fee
program, and includes reforms that, if implemented as intended,
will really benefit patients, innovation, and our economy.
These include earlier substantive interactions between FDA
and industry shared outcome goals that track performance in
calendar days clarification of least-burdensome language
provisions regarding conflict of interest and management
review.
On a personal note, I would like to thank yet again my home
State Members and the Minnesota Delegation for their tireless
work on these issues.
The Medical Device Innovation Consortium, a public/private
partnership that had roots in Minnesota but is now a national
program, is a promising example of government and industry
working collaboratively to identify and improve regulatory
inefficiencies.
Also encouraging are reports that FDA is concentrating on
three highly practical priorities: Improving efficiency in
clinical trials; balancing the pre- and post-market process;
and identifying ways to shorten the lag between FDA product
approval and reimbursement approval by CMS.
In closing, capitalizing on many of these opportunities
will require effective collaboration between patients,
industry, and the FDA. However, Congress can play an important
role as well by ensuring that all parties continue to work
toward these goals in a highly constructive manner.
Thank you very much for your attention.
[The prepared statement of Dr. Robert Kieval appears in the
Submissions for the Record on page 84.]
Chairman Brady. Thank you, Dr. Kieval. And don't keep
giving the Minnesota Delegation a bigger head, please.
[Laughter.]
It's tough enough to deal with these guys.
I want to talk real quickly--ask, real quickly, about the
loopholes at the agencies that are not part of the requirement,
standards and review, looking back. But before I do that, you
know our businesses really are concerned about the level of
implementation of regulation.
OIRA, looking at 2011, looked at 3,500 rules and
regulations that year. About 58 of them were major rules. Only
13 underwent complete cost-benefit analysis. That seems like an
awfully small amount of scrutiny and cost-benefit analysis
ahead of an awful lot of regulation.
I have adopted the Papa John's motto ``Better Ingredients,
Better Pizza.'' Better analysis means better regulation, when
it's done ahead of time.
So I want to ask: Is it the belief of the panel that we
ought to close the loopholes to ensure that independent
regulatory agencies also conduct a net cost-benefit analysis up
front?
Dr. Ellig, you were at the FTC. They would be included in
there. Do you agree?
Dr. Ellig. I agree that it is important to have all
agencies under the same set of requirements. I think there
really are two loopholes.
The one loophole is independent agencies that are not
covered by the Executive Orders and do not have a separate
Legislative requirement for cost/benefit analysis don't have to
do it.
The other kind of loophole is, under the current set of
institutions we have agencies analyzing their own regulations.
We have economists in the Executive Branch agencies who are
expected to analyze basically their boss' decisions----
Chairman Brady. Yes.
Dr. Ellig [continuing]. And render an impartial verdict on
that.
And then we have OIRA (Office of Information and Regulatory
Affairs), which is inside the Administration, you know,
assessing what the agencies are doing. And I think we get
better results with that than if we didn't have those
requirements and didn't have OIRA, but we still have a lot of
folks who are issuing regulations and essentially in charge of
reviewing what they themselves are doing.
So it would be nice to have, for the Executive Branch
agencies, a more independent look at the quality of their
analysis. And that is one of the things that some kind of
Judicial review would accomplish.
Chairman Brady. Great. To that point, standards, the
transparency on those cost-benefit analyses ahead of time,
where the public can comment. You can see what ingredients go
into the cake ahead of time, the analysis.
Professor Dudley, you were at OIRA. I know they have a best
practices, best standards' type approach, but statutorily
should we set up some process where there are standards, where
agencies can develop them publicly, you know, tailored to their
regulatory challenges; they can be commented on and reviewed as
part of setting appropriate standards up front?
Professor Dudley. Yes, I do think it would be valuable to
have a statutory standard that supercedes other authorities. I
think a lot of the problem is, as you mentioned in your opening
remarks, there are some statutes that direct agencies not to
consider, or at least have been interpreted by the courts as
telling agencies they can't consider things that any sensible
person would want to consider in making a decision.
Chairman Brady. On the look-back, it seems common sense
would be to review, as a number of you proposed, a regular
process to look back and compare the actual real-life impact
versus the original analysis, when it is done.
In general--how best do we accomplish that? Is that a
statutory change that requires it to be done? Is it including
frequent Judicial review as part of the process?
Dr. Kieval, sort of going backward--you know, you deal with
the FDA in heading this way on the panel--your views? Because
you see it in your industry, obviously, with regulations. Good
goals, you know, shared goals, how those regulations are
implemented create, as you say, huge impacts on patients, the
economy, and industries like yours.
Dr. Kieval. Yes. Absolutely. We have spent upwards of two
years negotiating the latest MDUFA agreements with the FDA. And
so I think there's a shared sense that if we are able to meet
those goals, then that will be to the tremendous benefit of
patients.
Certainly within industry we do look-backs and post-mortems
on our programs and our processes with great regularity. One of
the challenges that we have working with the agency is that
sometimes the people who are present at the end of the project
are not the same people that were present at the beginning of
the project. So better continuity of oversight of our projects
would be very helpful.
Chairman Brady. Dr. Ellig, your point was, you know,
standards up ahead. Make sure you address the issue of agency
bias, but look-back gives you a chance to really look at the
quality of the impact? Is that your position?
Dr. Ellig. Oh, yes, definitely. And I agree with Dr.
Greenstone that the ideal look-back is done by someone other
than the agency itself, to give kind of an independent view.
Chairman Brady. And, Dr. Greenstone, what is the best way
to create that process? Because if you do it independently and
objectively, I would think it would help. This is not a
partisan issue. This is really a smarter way to hit a goal.
Dr. Greenstone. This is exactly an issue of how to best
serve the American people. I think it would be good to embed in
the process the agencies themselves, to engage in look-back.
But I think it is very hard for people to be completely
objective.
I find it hard to be objective about myself sometimes, and
I think having my wife around to tell me the truth sometimes is
useful. Sometimes painful, but useful. And I think having an
outside agency or institution, a CBO-like thing for regulation,
would be really quite effective and would help even improve the
analyses that agencies do themselves.
Chairman Brady. My wife's look-back on me is a continual
improvement process.
[Laughter.]
And very timely, let me add. Thank you all, very much.
Senator Klobuchar.
Vice Chair Klobuchar. Thank you very much, all of you.
Dr. Greenstone, just to follow up on the Chairman's
question there with your idea of having this automatic review,
which I think is a good one, you would see this--you suggested
it possibly could be each agency, but there are concerns that
they would not probably be able to unmoor themselves from their
closeness to having to enforce the regulation. So do you think
it would be something that Congress would set up, then, to look
back at it?
And how do we do it efficiently? You know, my concern is we
are going to have new regulations that come out as we confront
new problems as a Nation, and you want to make sure that those
get done in a speedy manner instead of people getting hung out
to dry for years. So how would we be able to do this
efficiently?
Dr. Greenstone. With respect to creating an independent
body to do this, I think it would really take a very small
amount of money to set up a regulatory look-back organization
say that could be housed in CBO, or it could be independent,
but modeled after the CBO.
My own view is that that should be combined with increased
look-backs within government itself. And so one way to do that
would be to build on the Executive Orders that the President
put out. I assume that there's also a Legislative way to
mandate that.
In forcing agencies to do it themselves, I think there is a
little bit of the manana problem, they will always want to do
it tomorrow. And I think putting some trigger in there to force
them to comply by a certain period I think would be effective.
Vice Chair Klobuchar. Very good. The World Bank produces
their annual report about doing business. They actually look at
185 of the world's economies, and they look at their ease of
doing business, their regulatory environments.
In 2013, as well as 2012, the U.S. ranked 4th in ease of
doing business, and 13th in ease of starting businesses. So we
are doing some things right.
However, when you look at our tax system, with the fact
that we play red light/green light, that it is too complex, we
actually rank 69th out of 185 in that subcategory.
And I continually get complaints--as I know everyone up
here--not only about paying taxes, obviously, but also about
the fact that no one knows what is going to happen year in and
year out, and that it is too complex.
Dr. Greenstone, just following up, do you think simplifying
our Tax Code would benefit economic growth in the long run?
Dr. Greenstone. I think there are excellent opportunities
to do some simplification. And I think simplification might put
some tax lawyers out of business, but I think it would probably
be good for the overall economy and lead to greater growth.
Vice Chair Klobuchar. Professor Dudley.
Professor Dudley. Well, I am not a tax expert, so I would
answer that question as a regular person, and concur with both
of you.
But if I could add something to your previous question?
Vice Chair Klobuchar. Sure, the question the Chairman led
with, yes.
Professor Dudley. I agree with everything that my
colleagues have said, because I really do think a Congressional
office of regulatory oversight would be valuable for many, many
different things.
But I also think there needs to be a change in the default
that triggers review. We already have statutes that say look
back at your regulations. The Regulatory Flexibility Act does.
And yet meaningful retrospective review does not happen for all
the reasons that Michael mentioned.
So the default somehow needs to change so that a regulation
will expire unless you have shown it is having the effect it
should have.
Vice Chair Klobuchar. Okay. Thank you.
Dr. Kieval, thanks again for coming and giving us some
practical perspective on all of this. I also note, in addition
to Representative Paulsen, Senator Coats is here. We co-chair
the Medical Device Caucus in the U.S. Senate and he has done a
lot of work in this area.
Could you speak, Dr. Kieval, to the FDA's culture and
regulatory climate in recent years? You mentioned some
proposals you had, but where have you seen improvement? And
where do you--if you could just run it, where do you think we
could see the most dramatic improvements?
Dr. Kieval. Well I think the regulatory climate has become
more challenging over the past several years. And I think that
is reflected in the financing climate becoming more
challenging, as well, because investors often cite regulatory
concerns as some of the biggest inhibitors of their investment.
So, clearly the FDA has a focus on ensuring patients'
safety, and you can never be too sure that a product is safe,
and that is an important part of the mission, but another
important part of the mission is making sure that promising new
products do reach patients in a timely manner. And we think
that there are opportunities to continue to focus on that side
of the equation.
The agreements in MDUFA we think are going to increase
greatly the efficiency, which is going to translate into
tremendous cost savings for industry. And I think what Congress
can do is just keep both parties accountable to the goals that
have been set under MDUFA and FDASIA, and I think that will be
to our mutual advantage.
Vice Chair Klobuchar. In looking at the Medical Device Tax
issue, and we are obviously, many of us up here would like to
see it repealed and have been working--Senator Hatch and I have
a working group working on how we could pay for that, and
figuring out some practical ways it could actually get through
Congress.
Is it true that Excise Taxes are applied to the sales of
medical device firms whether they are profitable or not? And
doesn't that mean that these companies may be forced to pay
federal taxes even though they are not making a profit in many
cases because in this area where the up-front costs are so high
they have put a lot of money into research and development?
Dr. Kieval. Yes, that is absolutely true. Our company has
raised about $200 million of capital that we have invested and
continue to invest in research and development and clinical
trials. We probably will not reach profitability until we are
gaining revenues of, you know, $70 to $100 million per year, as
we recoup that investment and defray our ongoing costs. Yet we
would be responsible to start paying the taxes as soon as the
first U.S. dollar [of revenue] crosses the threshold.
So as we think about continued investments in innovation,
expanding manufacturing capabilities, and keeping high-paying
jobs, we are already planning for the impact of the device tax
that that is going to have on us.
Vice Chair Klobuchar. Thank you, very much.
Chairman Brady. Thank you.
Representative Paulsen.
Representative Paulsen. Thank you, Mr. Chairman.
I will just follow up a little. I will start out by
mentioning that, boy, when I'm in Minnesota I get a chance to
tour a lot of Minnesota companies, and Senator Klobuchar and I
have been quite frequently visiting our medical device
companies in particular.
And at a lot of these companies we get a chance to tour.
They're small business. They're manufacturers. And so I have
had a chance to talk with floor managers, the sea-level folks
working on the floor, as well as the business owners. And the
issue about uncertainty and the increasing regulatory burden
comes up frequently as a part of those conversations.
In fact, there was a recent study that was just done on the
state of manufacturing in Minnesota on a survey that was done:
60 percent of businesses in manufacturing are very concerned
about government policies and regulations. So it is not just
even concerning the tax side of the equation, but it's the
regulatory environment.
So having that fear of onerous regulation does not create
an environment that allows companies to invest with certainty
in their people or their equipment, certainly. And that is
definitely one factor that is a part of this Growth Gap which
the Joint Economic Committee is focused on.
Mr. Kieval, I just want to follow up. The medical device
industry is absolutely an American success story. You know
that. Senator Klobuchar and I both know it. Senator Coats knows
that. And we represent heavy sectors in that area.
But at the same time, I think we know that that leadership
is threatened. And in particular, as Senator Klobuchar noted
and you mentioned in your testimony, there is a recent study
with the U.S. Venture Capital. Funding has declined and it
continues to decline today. So it essentially is going to mean
more movement towards Europe, or toward other countries for
these new start-ups for break-through technologies. That harms
patients, obviously.
So knowing that the trend is going in that direction, and
knowing that medical devices and technology get approved in
Europe faster than it gets approved here, what are some ways as
a technology officer, for instance, that maybe we should be
looking down the road for, how can technology play a role in
making sure we are doing regulation smarter from a technology
perspective, and at the same time protecting from a safety
perspective?
Dr. Kieval. These are a part of the realities of what we
are dealing with on a daily basis. And we, under the guidance
of our boards of directors and our investors, have to make
these investment decisions very carefully about whether to
pursue products in the U.S. or outside the U.S.
You know, we've been able to garner our leadership position
by attracting top talent, and retaining top talent with high-
paying jobs, and investing heavily in ongoing innovation and
expansion of manufacturing capabilities. And, with the time and
amount of capital required to get our products across the
approval threshold in the U.S., there is just less money to
devote to those value-add activities.
On top of that, the Medical Device Tax is going to continue
to divert precious capital away from ongoing innovation and
U.S. jobs.
So I think ensuring that the agreements under MDUFA are
met--and I think we all expect clinical as well as economic
benefits to come out of those--but as we have talked about, I
think repealing the Medical Device Tax would also go a long way
to freeing up the greatly needed capital to help us maintain
our leadership position.
Representative Paulsen. Dr. Ellig, I was going to ask a
question. Because among the initiatives to assess the quality
of federal regulation systematically is the Mercatus Regulatory
Report Card as probably the most comprehensive.
Your testimony lists a lot of different criteria as a part
of that Report Card. What is the most important criteria, and
why?
Dr. Ellig. Oh, the most important criterion for a
regulatory impact analysis is analysis of the systemic problem
that the agency is trying to solve. Answering questions like:
Is there a problem?
Is it a system-wide problem that you might be able to solve
through a change in the rules of the game?
Or is it just some bad behavior by particular bad actors
where you might take more of a law enforcement approach rather
than a regulatory approach?
Is there a problem at all?
And what is the nature of the problem so that we can then
tailor a solution that would actually take care of the problem
but also take care of the problem at minimum cost?
Representative Paulsen. You have also used the term
``Regulatory Impact Analysis.'' Is that the same thing as cost/
benefit analysis? Or does it mean something else?
Dr. Ellig. Regulatory Impact Analysis is really broader.
Regulatory Impact Analysis is an overall analysis that
summarizes a lot of information about the nature of the
problem, the alternative solutions to the problem, and the
costs and benefits of the alternative solution.
So really the cost/benefit analysis is one piece of a
Regulatory Impact Analysis, and it would include economic
analysis, but also any other science that goes into
understanding the problem, understanding the harm,
understanding what we are trying to do.
Representative Paulsen. Well, Mr. Chairman, I know we are
going to have a lot more conversation about regulatory
policies, given the President's proposed some new suggestions
on the regulatory environment with energy, for instance, and
this is something I think this Committee is going to continue
to tackle. So I yield back.
Chairman Brady. Thank you.
Senator Coats.
Senator Coats. Thank you, Mr. Chairman.
And thanks to all the witnesses here for your presentations
to us. I think it is an extremely important issue. I agree with
my colleagues here. I think on a bipartisan basis if we are
going to address our current economic malaise, or much lower
and slower growth than we would like to see at this particular
point in time in our economy, regulatory reform has to be an
essential component of that, along with tax reform and budget
reform, and particularly entitlement reform.
And so I appreciate your contribution. I want to state
that, the panel here is kind of weighted toward the medical
device issue. And I enjoy co-chairing that Caucus with my
colleagues from Minnesota on medical devices. So rather than be
repetitive, let me just say Indiana says ditto to everything
that Senator Klobuchar has said, and Congressman Paulsen has
said, relative to medical devices.
We have a big stake in that in Indiana, and it is one of
the most, no pun intended, cutting-edge industries in our
State, providing a glimpse into the future of the kind of
technology innovation that we can accomplish here in the United
States, and we don't want to see that shipped overseas on the
basis of an egregious tax, or failure to bring about some
sensible regulations.
Secondly, I also want to note for the record--and this is
pretty startling; I don't know that you need to comment on
this--but the Small Business Administration a few years ago
estimated that the cost of complying with federal regulations
exceeded $1.75 trillion every year--nearly 12 percent of the
total GDP.
Now if that is only half right, we are looking at a
staggering cost here. And so the application of impact
analysis, and sound examination of how we go forward before we
regulate is extremely important.
I want to just ask a couple of questions. Dr. Ellig, I will
direct this to you: the President's announcement yesterday
relative to moving forward on climate control initiatives of
course has a dramatic effect on regulations coming out of the
EPA.
What measurements and analysis have you done, if any,
relative to EPA? And do you have any thoughts at this
particular point as to where this agency would fall in terms of
regulatory impact--sound regulatory impact analysis?
Too often I think ideology tends to drive agency regulatory
decisions, as opposed to sound analysis. I am not trying to
make a political point here; I am just simply saying if we are
going to address these problems we need to be more rational and
more scientifically oriented in terms of making some of these
decisions.
So do you have any thoughts or comments on that?
Dr. Ellig. Well, in the Regulatory Report Card the
environmental regulations actually often tend to rank in about
the top half. But what that is telling us, since the average is
about--the average score is about 50 percent--what that is
telling us is that the EPA, the Department of Energy, some of
the other entities that issue environmental regulations, have
made an investment in Regulatory Impact Analysis and are
producing documents that are at least, you know, trying to
appear to comply.
In comparison with some other agencies where you read the
Regulatory Impact Analysis and you say, ayah, they are not even
trying. So sometimes they are some of the better ones, but even
the better ones are not that great. So it is maybe a more
complicated answer than, they are great or, they are lousy.
Comparatively, there are some good examples but the best
ones still are not that great.
Senator Coats. Well this recent announcement by the
President that he is going to use the regulatory process to
achieve what a lot of us think needed to be legislated is going
to have enormous impact on energy costs in this country.
And so I think sound analysis, to the extent it can be
provided for us as we examine how to go forward and address
this, could be very helpful to us. I think the impact of this
is going to transcend the impact of a lot of regulations that
have come down, and it will particularly be relevant to
different states depending on the source of energy that they
supply to their people.
I think my time is about expired, and thank you, Mr.
Chairman.
Chairman Brady. Thank you, Senator.
Representative Hanna.
Representative Hanna. In a recent transportation hearing,
Administrator of the Federal Motor Carrier Safety
Administration, Anne Ferro, someone who has worked well with my
office, talked about hours of service for commercial trucks.
This is sort of a real-life example of what we are talking
about, and I want to ask you about the subjective nature, the
culture of the bureaucrats and workers behind these
regulations, and the disincentives they may or may not have to
not take risks but rather go through that regulation which
offers the most safety for them and perhaps the most expensive
for the public, not unlike Administrator Lisa Jackson's, to
paraphrase, cost is not our problem; in certain regulation, we
simply do--we are in the business of protecting the
environment, which I respect.
The Federal Motor Carrier Safety Administration was working
on a study. They didn't finish it. They did not include a study
on regulation that impacts specific industries--for example,
concrete, cellphone, trucks, asphalt, local deliveries of
aggregates.
I simply asked the question, or it was asked at the
committee hearing, how it made their new regulations credible
when they had not even finished the study yet? And never really
got an answer.
But I wondered, for example, Dr. Greenstone, you have great
ideas in terms of follow-up and analysis of what the real-world
impact is of some of these things, but do you believe there is
a cultural bias of, for lack of a better way for me to explain
it, of personal protection, and a disincentive to create
regulation which is more relevant in the real world, as opposed
to kind of subjective and value-based, which is more inclusive?
Dr. Greenstone. You know, I can't speak to the exact issue
that you mentioned about the Department of Transportation, but
what I do think is: There's not enough sunshine in the
regulatory process.
And through this kind of look-back mechanism that I think
would be a fantastic idea, and through having outside
approvals, that would produce the sunshine that would allow for
a healthier examination of some of the tradeoffs that you are
talking about.
Representative Hanna. Dr. Dudley, do you believe that there
is a bias towards more regulation inside of these
organizations, as opposed to less, since the more regulation
they create, the less risk comes to bear on their decision?
Professor Dudley. I think that is true, and I think it has
been documented that the incentives are to err on the side of
over-regulating. Because there are two types of errors a
regulator could make.
If they make a mistake and allow action that later turns
out not to have been safe, you all are going to haul them up
before Congress and they will be berated. But if they take an
action that maybe inhibits some innovation, that is less
visible. That is certainly true in the medical area.
Representative Hanna. How do you address, in the medical
area particularly with the FDA and the approval of drugs that
can be life-saving but long in the tooth, people are dying
while they are waiting for them, how do you change that culture
for anybody out there who--any of you four gentlemen and lady--
who might have an idea? How do you incentivize people to be
creative in the process, as opposed to restrictive?
Professor Dudley. Let me concur with Professor Greenstone
that the regulatory process is very insular, and there is not
enough transparency and sunshine.
We need to bring in the wisdom of crowds, and there are a
variety of ways of doing it. It is one of the things that we at
GW are thinking about. Getting a lot of different perspectives
on a regulation, both after it is is in effect, but also
before, I think could improve the regulatory process.
Dr. Ellig. I think one of the things Congress could do
through oversight is continually asking agencies--and this is
whether it is regulation, or spending programs, or whatever:
What is the result of what you did? And what is the
evidence that you are actually solving problems, and that this
is working?
I mean, a lot of times in this town we get caught up in the
idea that, well, we've solved the problem because we passed a
law. We solved the problem because we adopted a regulation.
Sort of the government--the fact that the government engaged in
activity is taken as proof that the problem is solved.
Representative Hanna. Check that box.
Dr. Ellig. Yes, check the box, and whatever. But, through
vigorous oversight asking, all right, is the problem actually
solved? Is the air cleaner? Is the water cleaner? Or whatever
particular problem you are trying to deal with.
Dr. Kieval. As an industry right now our focus is not as
much on wholesale reform of regulation, but it is on making
sure that the regulations are applied in a transparent and
consistent and a reasonable and predictable manner, and we
think that MDFUA is going to help that.
You know, a simplistic comment that I could add is, the FDA
is highly visible for all of the negative decisions that it
makes, and they are highly criticized for all the decisions
that people think are wrong. I think we could do a better job
of celebrating the right decisions that they make, when they do
make decisions to let new technologies out and to begin helping
patients.
And I think they deserve as much visibility for those
decisions as they do for what we think are the wrong ones.
Representative Hanna. Thank you. And my time has expired.
Chairman Brady. Thank you.
The former Chairman of JEC, Representative Maloney.
Representative Maloney. Thank you, Mr. Chairman, and Vice
Chairwoman.
Mr. Greenstone, you testified that an equivalent of the
Office of Information and Regulatory Affairs should be set up
to provide Congress with regulatory impact evaluations. And why
does a new office need to be created? And why can we not simply
assign this task to an existing governmental body?
Senator Coats in his questioning pointed out that we
already spend $1.7 trillion a year in regulatory oversight, and
regulatory impact studies. So why do we need a new office? Why
can't we just work through the $1.7 trillion that we are
already spending?
Dr. Greenstone. Thank you for that question, Congresswoman
Maloney.
I think actually currently we spend not very much on
regulatory analysis. The regulations impose lots of costs and
introduce lots of benefits on the overall economy, and I think
that is what the $1.7 trillion refers to.
My view on why we need a new body--and I recognize that we
are in tight budget times--is that currently the Regulatory
Impact Analysis comes out of the very agencies that are
implementing the regulations, and it can be hard for people to
be objective with themselves about what they are doing.
And so having an outside body like the CBO serves Congress
in terms of providing independent information. I think it would
be an effective way both to improve the analyses that are done
inside the Administration, and also just to provide sunshine
that would benefit everyone.
Representative Maloney. Also could you comment on the
President's speech yesterday on carbon pollution? In his
speech, the President pointed out that Americans are paying for
inaction on carbon pollution through higher food costs, and
higher taxes to pay for disaster relief and rebuilding. He also
mentioned that certain states will need to budget for larger
wildfire seasons. And how will the EPA take these costs into
account in preparing their own cost/benefit analysis?
Dr. Greenstone. So I think the President's announcement
yesterday is probably, to this Committee's point, one of the
most consequential regulatory actions in many years. And with
respect to your question, we are already experiencing costs of
climate change. Hurricane Sandy is an excellent example. And
some of the crop failures in the last two summers have been
linked to climate change.
And I think what the President is saying is, we are already
paying those costs. We are paying them in a very indirect way.
Let's start to pay them up front, and maybe we will save on net
through reduced damages in the future.
Representative Maloney. Well in creating this new body that
you are advocating for, where does it end? There was a bill in
one of my committees that I serve on to have more of a cost/
benefit analysis on top of the cost/benefit analysis already in
Dodd-Frank, and in the SEC.
So it seems like if you have all these analyses, it might
get to the point where you can never do anything. Not only do
you have the analysis of the committee, you then have the cost/
benefit analysis; you then have Judicial review; now you're
proposing another regulatory body to have yet another cost/
benefit analysis. When does it end? And how much would it cost?
Would it not be more appropriate if you have a problem to
ask GAO to do a specific analysis of that particular cost? And
we're working within the regular framework that is already
existing in government as opposed to going out and creating yet
another layer?
I fail to understand what is the benefit. If we have a
problem, look at it. Have the analysis done. Several
Presidents--I'll cite the Grace Commission that President
Reagan had--have come in and looked at particular areas, and
particular areas and analyzed them. There is now a focus in
energy where outside groups and governmental groups are doing
more of an analysis of our cost/benefit in our energy
strategies.
But to go in and create another complete bureaucratic
overlay, what is the benefit? Why not focus on the problem and
solve it, as opposed to creating yet another huge governmental
employment bureau?
Dr. Greenstone. So I don't come here before you today
lightly to suggest that there be another bureaucracy. I think
the things to keep in mind are that--I'm just citing the figure
other people have used--but that the overall impact of
regulations on the economy is numbered in the trillions of
dollars annually.
And the problem is, although there are many people
analyzing these regulations, as you point out, none of them,
zero point zero, analyze them afterwards. And so all the
analysis is done up front, and it is generally done with very
good intentions, but the problem is people cannot predict the
way things are going to turn out.
And so the reality often ends up being different than what
people projected. And so what I am proposing is that this new
institution is just a small increase in CBO and would provide
the kind of information that currently does not exist.
Again, to put it in context, I believe that this could be
funded for $15 to $20 million a year, probably less. And it is
a small investment, in my view, relative to the trillions of
dollars of impacts that the regulations have on the economy
currently.
Representative Maloney. My time is expired.
Chairman Brady. Thank you.
Representative Delaney.
Representative Delaney. Thank you, Chairman Brady, and
thank you for holding this important hearing. I want to thank
all the the witnesses here today for their thoughtful comments.
I think this question about a prospective versus a
retrospective analysis is really important. And I think, Dr.
Greenstone, you made the point quite well, which is our ability
to do prospective analysis on these questions is inherently
limited unless we were to somehow adopt and embrace and really
understand an incredibly dynamic model for understanding all
the implications of these various regulations which, much to my
dismay, it has been very hard for us to do that in the CBO on a
prospective basis. And I think it might be even more complex
here, because behavior does change.
I mean, the Clean Air Act I think--I don't have a terrific
historical perspective, but that was done really for a quality
of life perspective. I don't think people really understand
that, depending upon the estimates, it has been an 8-to-1 to
25-to-1 savings from a pure economic standpoint.
So I think this notion of an incredibly vigorous, rigorous
data-driven retroactive analysis, if you will, done by an
independent agency is really, really important. My question for
you, Dr. Greenstone--and then I have a question for Professor
Dudley--is:
Do you anticipate that this entity would really be able to
effectively analyze all of the various implications of
regulations, including things that are not even anticipated
based on the regulatory intent? Some of which may be quite
positive under the category of unintended consequences. We
could have really positive unintended consequences, or we could
have really negative unintended consequences. Do you think that
it can effectively do that?
Dr. Greenstone. You know, that is a very important
question. Thank you. No analysis is perfect. I feel very
confident that doing the first bit of ex post analysis has got
to be an improvement over doing none.
I train graduate students. When Chairman Brady mentioned--
and I wrote this down--that he was interested in doing a better
job of quantifying the costs and benefits of regulations, you
know, their hearts were aflutter with the notion that people
might be interested in that.
[Laughter.]
And I think having an agency, or a group of people devoted
to that, who spend their lives on that--and they could be
former graduate students of mine--would I think produce a lot
of information that could help shape the regulatory process
going forward in a way that better delivers benefits.
Representative Delaney. And I assume it could be very
transparent. Again, unlike some of the things we sometimes see
in CBO, which it's not quite clear how they came up with their
answers, this, because it is a retrospective analysis, I would
think we would be able to have detailed disclosure as to what
inputs went in, and what analysis was done, which I think would
also help inform new regulations even if we don't do as much
prospective analysis--because I generally think all regulation
should be held to a higher standard. But we have to recognize
that prospectively it is hard to figure some of this stuff out,
whereas on a retrospective basis we ought to have absolute
answers as to whether these things are actually working.
And my question, maybe, for Professor Dudley in the same
theme is: How do we think about overlapping regulations as it
relates to this? Because my background is in the financial
services industry, which prior to the crisis was subject to
four banking regulators, and now has three banking regulators.
And if you look at regulations, they put forth or promulgate
individually, you'll do a certain cost/benefit analysis. But if
you actually weave our somewhat byzantine overlapping, in my
judgment, banking regulatory approach to the market, you would
conclude that the effects of various regulations are producing
a different cost/benefit analysis than they would individually.
How do you think about these decisions in that context?
Because it is not just individual regulations; it is
regulations working together towards the same goal. Do you
think this capability could help us in some of that? Because
that to me seems to be some of the low hanging fruit. Here we
have multiple people trying to do the same thing. There's turf
wars, et cetera. Whereas, if we could kind of level-set all of
these things and look at them individually, look at their
effect together, we could actually come up with a really good
analysis of what we should be doing.
Professor Dudley. Well I agree. That is something that
Presidents have assigned to the Office of Information and
Regulatory Affairs. When they review agencies' regulations,
part of that review is: Are they doing the analysis they
should? But part of it is interagency review, OIRA shares draft
regulations with other agencies to look for conflict, or
overlap.
What is missing is your area, the financial regulations.
The independent regulatory agencies don't have the value of
OIRA's interagency review.
Representative Delaney. Right.
Professor Dudley. Which is another argument for the
Congressional regulatory oversight. Because not only could that
help you evaluate regulations, but as you develop legislation
that office would have that institutional knowledge to know
what other agencies are doing similar things.
Representative Delaney. So it could look at individual
regulations, and then it could look at a holistic regulatory
approach to problems we want to regulate.
Like we clearly as a country want to regulate the banking
industry. So we should look at not only individual banking
regulations, but if the various banking--I use banking as an
example; it applies to other areas, obviously, the economy, the
quilt that we've weaved, if you will, for regulations, whether
it's actually achieved so it could do both. I think it is a
great idea, and it is something we should be advancing hard.
So thank you for your testimony.
Chairman Brady. I want to thank all of you. Regulation
reminds me, when my first son was 5 years old, putting the
group of five-year-olds on a soccer field. It doesn't actually
mean you see a soccer game.
[Laughter.]
The way they run together in packs, and it doesn't even
resemble it. Adding regulation upon regulation does not always
mean you achieve a goal. And so having independent, objective,
high-quality analysis up front, removing the bias, having
standards we can comment on, a look-back that is reliable to
improve the next round seems to me to be areas of common ground
as we go forward.
I want to thank, on behalf of Vice Chair Klobuchar, each of
the witnesses today. Very, very helpful, thoughtful, and
insightful testimony and answers, as well. So thank you all
very much for being here today.
The hearing is adjourned.
(Whereupon, at 11:15 a.m., Wednesday, June 26, 2013, the
hearing was adjourned.)
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Kevin Brady, Chairman, Joint Economic
Committee
This month the current recovery celebrates its fourth anniversary.
Now is a good time to assess how the U.S. economy is performing.
Unfortunately for American families, the current recovery remains
the weakest since World War II. There is a troubling Growth Gap in
economic performance between this recovery and the average of post-war
recoveries, leaving our economy four million private sector jobs and
$1.2 trillion short. While Wall Street is booming, every man, woman and
child in America is missing nearly $3,000 in real disposable income due
to the Growth Gap.
During this Congress, the Joint Economic Committee has been
examining the causes of the Growth Gap and the types of alternative
policies to close that gap. The JEC has studied how current fiscal and
monetary policies have held back this recovery. Today, the JEC will
explore regulatory policy.
From town hall meetings with my constituents in Texas to
conversations with business leaders and economists across America,
there is one consistent message: Uncertainty over the costs of new
regulations in healthcare, the environment, labor issues and financial
services is suppressing business investment and the creation of new
jobs along Main Street.
The burden of federal regulations is large. At year-end 2012, the
Code of Federal Regulations had 238 volumes and 174,545 pages.
That burden is growing. In 2012, the Federal Register--which
publishes proposed new rules and regulations, final rules and changes
to existing regulations--totaled 78,961 pages. Three of four highest
page counts since the Federal Register began publication have occurred
during the Obama presidency.
And that burden is costly. NERA Economic Consulting, in a study
last year commissioned by Manufacturers Alliance for Productivity and
Innovation (MAPI), estimates the current direct cost of compliance with
``major'' regulations--those with an estimated cost greater than $100
million per year--issued between 1993 and 2011 to be between $265
billion and $726 billion per year. Clyde Wayne Crews of the Competitive
Enterprise Institute estimates the total cost of regulation in America
approaches $1.8 trillion annually--or nearly 12% of GDP.
Given this historically weak recovery, the rise of technology to
help us meet regulatory goals more cheaply and a shared belief that
America should continue progress on a clean environment and safe
workplace, when regulations are necessary doesn't the public deserve
the most effective regulation at the least cost?
Smart regulations that improve the market process and its incentive
structure to accelerate progress rather than dictate particular
outcomes will prove superior to tens of thousands of pages of mandated
rules and micro-managed instructions.
Devising process-enhancing rules that engage the private sector's
versatility and creativity require objective upfront analysis and
thoughtful design. Yet federal agencies often do things the other way
around--deciding first what they want to do and then using whatever
analysis is performed to justify their preconceived ``solution.'' This
abuse must stop.
In 1981, President Reagan issued an executive order requiring
executive branch agencies to conduct Regulatory Impact Analysis,
commonly known as cost-benefit analysis, before issuing major new
regulations. This first step toward smarter regulation had its
limitations.
An executive order affects only executive branch regulatory
agencies and therefore does not affect independent regulatory agencies
such as the Consumer Product Safety Commission, the Federal Trade
Commission, the Federal Reserve, and the Consumer Financial Protection
Board.
Over the years, Congress has exempted broad swaths of federal
regulation from the scrutiny of cost-benefit analysis through
provisions of the Clean Air Act, for example. While there are
government-wide ``best practice'' standards on how agencies should
conduct cost-benefit analysis, they are not uniformly applied and are
not legally binding. The quality of agency cost-benefit analyses varies
greatly.
Agency bureaucrats are naturally biased toward their proposed
regulation and have learned how to manipulate cost-benefit analysis to
justify whatever new regulations they wish to issue. For example,
former Administrator of the Office of Information and Regulatory
Affairs, professor John Graham, closely examined Corporate Average Fuel
Economy (CAFE) standards for trucks in his testimony before the House
Committee on Oversight and Government Reform in September 2011 and
found that to inflate the benefits of their new rule, regulators had
cut the discount rate and the so-called ``rebound effect'' of increased
driving with better mileage to half or less. He also found that they
failed to carefully consider the rule's effects on vehicle size,
performance and safety.
In other words, today too few proposed rules are fully analyzed.
There are too many loopholes, no uniform requirement across all
agencies, a lack of standards with which to conduct the analysis, no
check-and-balance against agency bias, no comparison of past analysis
to real life impacts and little recognition of the total burdens on the
economy of regulation.
We must do better. The purpose of this hearing is to discover ways
in which Congress can make the regulatory process ``smarter,'' more
cost effective and better designed to accomplish the goals without
damaging the economy.
In particular, the Committee hopes to hear from today's witnesses
about the deficiencies in cost-benefit analysis as it is now practiced
and how agencies can do a better job of quantifying and measuring the
costs and benefits of both proposed and existing regulations. I look
forward to the testimonies.
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Prepared Statement of Michael Greenstone, Massachusetts Institute of
Technology, The Hamilton Project, The Brookings Institution
Thank you Chairman Brady, Vice Chair Klobuchar, and members of the
Joint Economic Committee for inviting me to speak today.
My name is Michael Greenstone, and I am the 3M Professor of
Environmental Economics at the Massachusetts Institute of Technology,
the Director of the Hamilton Project, and a Senior Fellow at the
Brookings Institution. My research focuses on estimating the costs and
benefits of environmental quality, with a particular emphasis on the
impacts of government regulations.
I appreciate the opportunity to speak with you today about
opportunities to improve the government's regulatory system. Under all
economic circumstances, regulatory efficiency and clarity are crucial
objectives for the credibility and predictability of the government's
role in the marketplace. However, given the continuing weak economic
environment, it is absolutely essential to design a regulatory
structure that protects the wellbeing of our citizens without imposing
unnecessary costs on American businesses and society as a whole.
We can achieve these objectives without compromising our values in
key areas ranging from the protection of public health to the
supervision of financial markets by ensuring that the Executive and
Legislative branches have the tools of analysis and measurement they
need to review current and proposed regulations. The purpose of my
testimony is to describe in concrete terms how this can be
accomplished.
INTRODUCTION
American government, at every level, regulates a broad array of
social and economic life. Regulatory policy determines the air we
breathe, the quality of the water we drink, the materials we use to
construct our homes, the cars we buy, the safety of our workplaces, the
investments we make, and much more. Government regulates these
activities because in cases of market failures, for example, our free
market system does not create the necessary incentives for businesses
and individuals to protect the public good.
But, in making decisions about regulations, public officials must
choose which areas of our lives merit government rules, as well as how
stringent those rules should be.
The Clean Air Act is a classic example of a regulation with
significant benefits and costs. Before its passage in 1970, there were
few constraints on businesses that emitted pollution as a byproduct of
their operations. The result was poor air quality. As one small
example, white collar workers in Gary, Indiana, often brought an extra
shirt to work because the first would be dirty from the air and unfit
to wear by midday. Even more importantly, some of my research, as well
as research by others, has found that the polluted air led to elevated
mortality rates that reduced the lifespans of the American people.\1\
Obviously, no business sets out to cause these impacts; but, in trying
to maximize their profits, it was not in their interests to install
expensive pollution abatement equipment when their competitors did not.
As a result, they did not act to adequately reduce emissions.
---------------------------------------------------------------------------
\1\ Kenneth Chay and Michael Greenstone, ``The Impact of Air
Pollution on Infant Mortality: Evidence from Geographic Variation in
Pollution Shocks Induced by a Recession,'' Quarterly Journal of
Economics, 2003, 118(3); Olivier Deschenes, Michael Greenstone and
Joseph Shapiro, ``Defending Against Environmental Insults: Drugs,
Emergencies, Mortality and the NOx Budget Program Emissions Market,''
Department of Economics, MIT (2011).
---------------------------------------------------------------------------
At the same time, the Clean Air Act's regulations require firms to
alter their production processes in ways that raise their costs.
Indeed, some of my recent research finds that an important set of Clean
Air Act rules has raised polluting industries' costs of production by
roughly 2.6%. This has reduced firms' profits and led to higher prices
for consumers. Further, it has caused regulated firms to scale back
their operations, which led to employment losses at those firms.\2\
Although the ultimate effect on the level of jobs in the economy is
likely minimal in normal economic times, recent research indicates that
workers who lose their jobs due to regulations often face prolonged
periods of unemployment and become reemployed at lower wages.\3\
---------------------------------------------------------------------------
\2\ Michael Greenstone, ``The Impacts of Environmental Regulations
on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act
Amendments and the Census of Manufacturers.'' Journal of Political
Economy, 2002, 110(6); Michael Greenstone, John A. List and Chad
Syverson, ``The Effects of Environmental Regulation on the
Competitiveness of U.S. Manufacturing,'' Department of Economics, MIT
(2011).
\3\ Reed Walker, ``The Transitional Costs of Sectoral Reallocation:
Evidence From the Clean Air Act and the Workforce,'' Department of
Economics, Columbia University (2011).
---------------------------------------------------------------------------
The challenge then for regulators is to consistently set rules with
benefits that exceed their costs.
In a pair of Executive Orders, President Obama has created a
framework that has the potential to be the most fundamental shift in
regulatory policy in more than three decades. The Executive Orders
require that federal agencies routinely review existing significant
regulations in order to ``determine whether any such regulations should
be modified, streamlined, expanded, or repealed'' with the purpose of
making the ``regulatory program more effective or less burdensome in
achieving the regulatory objectives.'' These reforms offer the promise
of finding a better balance between our health and safety and our
economic growth.
To understand why the president's efforts are so critical, imagine
if the Food and Drug Administration approved new drugs without ever
having tested them on people--that it approved drugs knowing only in
theory how they were likely to affect the human body. Further imagine
if such drugs remained on the market for years, or even decades,
without their effects ever being subject to evaluation. This path is
simply inconceivable, but until recently was how the vast majority of
government regulations were treated.
Make no mistake--inadequate regulatory policy can be, as with drug
approvals, a life-or-death issue because of the significant role
regulations play in every aspect of our daily lives.
A bit of history: U.S. regulations used to be designed essentially
in the dark. Then, in 1981, President Ronald Reagan issued an executive
order institutionalizing the idea that regulatory action should be
implemented only in cases when, among other provisions, ``the potential
benefits to society for the regulation outweigh the potential costs to
society.'' It sounds obvious. But this idea of applying cost-benefit
analysis in the regulatory arena fundamentally altered the way in which
regulations were considered.
In 1993, President Bill Clinton outlined more specific guidelines
for prospective analysis of cost-benefit trade-offs. And yet, the
regulatory review process was still operating with one hand tied behind
its back. As a general matter, a regulation's likely benefits and costs
were considered only before the proposal was enacted--the point when we
know the least precisely because the regulations are untested.
Consequently, prospective estimates of the costs and benefits must rest
on many unverifiable and potentially controversial assumptions.
And, once a regulation passed through a prospective analysis and
went on the books, it could remain there for decades without any
further evaluation.
Some regulations work out exactly as intended. But some, of course,
do not. For example, an air pollutant may prove to be more harmful than
was originally understood. Or innovation may lead to new and less
expensive pollution-abatement technology. In our rapidly changing
world, regulations can and should adapt to change.
President Obama's Executive Orders take a critical step forward by
looking backward. They require that agencies routinely reevaluate the
costs and benefits of existing regulations and identify whether the
goals of a regulation could be achieved through less expensive means.
This revolutionary process of retrospective analysis offers the promise
of finding a better balance between our health and safety and our
economic growth
In the remainder of my testimony, I will identify two further
changes that would increase the chances that our regulatory system
consistently produces rules with benefits that exceed costs.
I. EXTENDING EXECUTIVE ORDERS 13563 AND 13610
The first change is to make three reforms that build on Executive
Orders 13563 and 13610.
First, I recommend institutionalizing the retrospective review of
economically significant rules in a public way so that these reviews
are automatic in nature. In the case of rules that are currently in
force, this would mean publicly committing to a retrospective analysis
of each existing rule within a pre-specified period. This might be 5 or
10 years, with the length of time depending on the particulars of the
rule and the results of any previous reviews.
In the case of new rules, the implementing agency would be required
to announce a timetable for review with a maximum allowable amount of
time, perhaps 5 or 10 years, with shorter time periods being
preferable. In addition, the agency would be required to pre-specify
the expected benefits (e.g., reduced child mortality rates) and costs
(e.g., reduced business profits) so that the terms of the subsequent
review would be known in advance. The agency would also be required to
identify how these benefits and costs would be measured, such as the
types of data and other information that it anticipates being necessary
for review.
Second, the relevant agency should commit to undertaking a new
rulemaking when the results from the retrospective analysis differ from
the benefits and costs that were expected prior to the rule's
implementation. As with the retrospective analysis, there should be a
time limit for conducting the new rulemaking. In cases where the
realized benefits exceed the costs by a wider margin than expected,
there may be further opportunities to maximize net benefits. In cases
where the rules are found to be ineffective or unjustified, agencies
should identify ways to modify the rules or abandon them. Finally, if
the retrospective analysis confirms the original expectation of
benefits and costs, then there would not be a need for a new
rulemaking.
Third, these efforts would be strengthened if they were accompanied
by a triggering mechanism to ensure that retrospective evaluations
occur and, when appropriate, for new rulemakings to be undertaken
within the prescribed time periods. One approach would be for agencies
to announce publicly and post on their website the deadline for a
rule's review and reconsideration. A stronger approach would be for
judicial action to compel reviews and rulemaking in the cases where an
agency has failed to comply with a review timeline or to act upon its
results.
II. A CBO FOR REGULATIONS
The second change is to ensure that the quality of the reviews is
commensurate with the stakes of getting regulatory policy right. In
this spirit, there are some difficulties with the approach I just
outlined. Many agencies do not have the staff, expertise, or resources
necessary to undertake these reviews. Further, the process of self-
evaluation is challenging for all organizations, as it requires
complete objectivity. Indeed, history is unkind to organizations that
fail to get outside reviews of their work.
My recommendation is to establish a new, independent body for
regulatory review. This body could be housed within the Legislative
Branch, and it could be modeled after the Congressional Budget Office
(CBO) or even become a division within the existing CBO.
As you know, before the CBO was established, only the President had
a ready source of budgetary and economic data and analysis. Congress
was forced to largely rely on the Office of Management and Budget (OMB)
for this sort of information. The CBO was invented to level the playing
field. Its analyses allow Congress to consider the economic and
budgetary implications of new policy ideas. Crucially, the CBO also
helps Congress evaluate the information that it receives from the
Executive Branch.\4\
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\4\ Congressional Budget Office, ``CBO Testimony: Statement of
Robert D. Reischauer, Director, Congressional Budget Office, before the
Joint Committee on the Organization of Congress'' (1993). http://
www.cbo.gov/ftpdocs/105xx/doc10580/1993_06_10_mission.pdf
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The entire budget process has benefited from CBO's existence. This
is a direct result of its independence. The budgetary analyses and
proposals of all legislators and Executive agencies are now created to
a higher standard, knowing that they must ultimately stand up to
scrutiny by the non-partisan CBO.
This system of budgetary review and economic analysis could be a
model for a reorganized regulatory review process. Like the CBO, this
new organization would reside in the Legislative Branch, and it would
be non-partisan. The organization would be charged with conducting
independent regulatory impact evaluations. Some of the organization's
activities would be statutory in nature--for example, automatic reviews
of economically significant regulations--while other evaluations could
be performed at the request of Congressional committees and members.
Such an organization would directly strengthen our regulatory
system. Agency analyses would benefit from the scrutiny that they would
ultimately receive from this new, independent organization. Further,
the results of the retrospective reviews would become part of the
agencies' automatic assessments of their regulations that I described
above. I believe that providing this type of rigorous, independent
review would build confidence within the business community and a
better sense of transparency.
Finally, this new organization could help to increase the
credibility of the regulatory evaluations by developing an explicit
checklist to determine the rigor of regulatory analyses. The checklist
should favor randomized control trials, the gold standard in terms of
evidence, and natural experiments over models and observational
studies. A 2011 Hamilton Project paper provides some other ideas for a
check list.\5\ Such a checklist could also be issued as guidance by the
Administration to its agencies.
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\5\ Ted Gayer, ``A Better Approach to Environmental Regulation:
Getting the Costs and Benefits Right,'' Discussion Paper 2011-06, The
Hamilton Project, Brookings Institution (2011).
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Of course, the creation of such a body would require resources,
which are difficult to come by in our current fiscal environment.
However, I think it is extraordinarily likely that such an office would
pay for itself many times over. To put this in context, the current CBO
budget is less than $50 million annually. My best estimate is that the
new budget for such an organization would be less, perhaps
substantially so.
This is a very small amount of money when compared to the potential
costs and benefits that regulations impose on our economy. Although it
is difficult to determine the total number of economically significant
regulations that are on the books, the Office of Management and Budget
reviewed 540 major regulations between 2001 and 2010,\6\ which are
defined as having an effect of more than $100 million on the economy
annually--either in costs or benefits. Consequently, it seems safe to
conclude that the total costs and benefits of regulations can be
measured in the hundreds of billions of dollars annually. It is
apparent that we have a lot at stake economically with regard to our
regulatory system and the cost of finding out which parts are working
is almost trivially quite small in comparison.
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\6\ Office of Information and Regulatory Affairs, Office of
Management and Budget, ``2011 Report to Congress on the Benefits and
Costs of Federal Regulations and Unfunded Mandates on State, Local, and
Tribal Entities'' (2011).
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By creating a body that can undertake rigorous analysis of the
costs and benefits of regulation--both ex-ante and ex-post--
policymakers will have better tools for protecting those regulations
with great benefits for our society, reforming those regulations that
impose unnecessary costs, and potentially culling those that no longer
serve their purpose.
IV. CONCLUSIONS
In conclusion, our regulatory system is a linchpin of our well-
being. It allows us to live longer and healthier lives, among many
other important impacts. However, these important benefits come with
direct economic costs. The purpose of my testimony has been to identify
some reforms that will help to ensure that our regulatory system does
its job in the most cost-effective way possible--in which the benefits
to society exceed the costs.
To quickly summarize, I propose two key reforms:
1. Institutionalize a process by which agencies automatically
undertake retrospective reviews of regulations and initiate a
new rulemaking when the results from the retrospective analysis
differ from the expected benefits and costs.
2. Create a new, independent body for rigorous, objective
regulatory review that is modeled on the Congressional Budget
Office.
We live in a rapidly changing economy and need a regulatory review
structure that evolves to meet the new and different needs of our
society. The reforms that I have outlined here will allow our
regulatory system to consistently produce rules with benefits that
exceed costs. That would be good for our well-being, and good for the
American economy.
Thank you once again for inviting me to participate in this
discussion. I will gladly respond to any questions.
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Prepared Statement of Robert S. Kieval
Good morning. Congressman Brady, Senator Klobuchar, members of the
Joint Economic Committee, it is an honor to have this opportunity to
address you today and to endeavor to answer your questions. I have a
deep respect for the work of this Committee, and for all of the policy
makers striving to preserve and foster innovation in the United States.
My name is Robert Kieval, and I am the Founder and Chief Technology
Officer of CVRx, a Minneapolis-based medical device company. I have
worked in the medical technology industry for over 20 years, with
experience in both a large medical device company and in the
entrepreneurial, start-up environment. In addition to my work at CVRx,
I serve on the Board of Directors of two industry advocacy
organizations, the Medical Device Manufacturers Association (MDMA) here
in Washington, DC, and LifeScience Alley (LSA) in Minneapolis.
In our 11 year history, CVRx has developed an implantable medical
device that is intended to treat two prevalent cardiovascular diseases:
hypertension, or high blood pressure, and chronic heart failure.
Together, these diseases afflict over 80 million Americans. They are a
primary cause of more than 128,000 deaths each year in the United
States, and represent an annual economic burden of over $100B to CMS
and private insurers in health care costs and lost productivity. They
are diseases for which effective new treatments are desperately needed.
Our product was approved in Europe in 2011 for the treatment of
hypertension, and it is under clinical evaluation here in the U.S.
The medical technology industry accounts for at least 400,000 jobs
in the U.S., supports nearly 2 million additional jobs in adjacent
industries, and remains one of the few American industries that is a
net exporter of goods and services. Small businesses like CVRx, often
with fewer than 50 employees, are a vital source of innovation and
comprise approximately 80% of the industry.
Companies like ours, with a single product focus and no alternative
revenue streams, depend on outside investment for our existence.
Investors require assurance of a reasonable and predictable path to
product approval. Ambiguous or overly burdensome approval thresholds
can fatally inhibit investment and prevent development of a potentially
important new therapy. This is especially critical for patients
suffering from diseases that have few treatment options.
Since 2005, the time and capital required for a company to get a
clear definition of its required regulatory pathway, to negotiate
product testing and clinical trial requirements, and to obtain an
approval or clearance decision once a completed application has been
submitted have risen dramatically. Small, venture capital-backed
companies typically spend $500,000 to $2 million per month to operate.
A six to twelve month delay, for example, in reaching agreement with
the FDA about a clinical trial design issue, or in the time required to
complete an overly burdensome clinical trial, could result in the loss
of precious time to deliver a potentially life-saving new treatment to
patients, and require a company to raise millions of dollars of
additional capital in order to get through the approval process.
The regulatory approval process itself has become increasingly
inefficient, inconsistent and unpredictable, and the level of clinical
evidence required to obtain product approval has also continued to
rise. This has led to a situation in which patients outside of the U.S.
frequently gain access to American innovation and technology an average
of two years before American patients do. In many cases it has also led
to jobs and Research & Development moving overseas, weakening the
competitiveness of our medical technology industry. Such are also the
cases for CVRx. While we work through the regulatory approval process
here at home, our product is being used to treat patients in Germany,
Italy, the Netherlands, Hungary and Turkey. I just returned from a trip
to Europe where I heard firsthand from doctors how patients there are
benefiting from our technology. As a result, the jobs that we are
adding are also largely overseas. Finally, the recently enacted Medical
Device Tax, a 2.3% excise tax on revenues irrespective of a company's
earnings, has put additional financial pressure on companies and has
compounded these difficulties. For large companies, these often
represent issues of profitability. For small companies, they may be
issues of survivability.
A 2011 study by the National Venture Capital Association (NVCA)
found that U.S. venture capital firms have and will continue to
decrease their investment in biotechnology and medical device start-ups
and shift focus away from the United States toward Europe and emerging
markets. In that study, FDA regulatory challenges were identified as
having the highest impact on these investment decisions. The first
quarter 2013 MoneyTree report released by PriceWaterhouse Coopers and
NVCA reflects a continued decline in medical technology investment. In
fact, the Life Science sector experienced a dramatic drop to $98
million, the lowest quarterly amount since the third quarter of 1996.
To put this in perspective, in 2007 alone, 116 early stage medical
device companies raised approximately $720 million in initial venture
capital. These early stage investments are the single largest indicator
of future innovations and breakthroughs, and thus the current
environment does not bode well for patients.
To be sure, federal regulators and policy makers have acknowledged
and have been working to address these issues. Our industry appreciates
the overwhelming bipartisan support for The Food and Drug
Administration Safety and Innovation Act of 2012 (FDASIA). This
legislation reauthorized the medical device user fee program for five
years and includes many reforms that, if implemented as intended, will
be a real benefit for patients, innovation and our economy.
These reforms include earlier substantive interactions between FDA
and industry, better manager-to-reviewer ratios to deal with capacity
issues and shared outcome goals that will track performance based on
calendar days.
While it is too soon to evaluate the ultimate impact of these
measures, the industry is beginning to see early evidence of
improvements, and CVRx has also had positive experience in this regard.
In addition, the Medical Device Innovation Consortium, a public-private
partnership that had its roots with LSA in Minnesota but has now become
a national program, is a promising example of government and industry
working collaboratively to identify and improve regulatory
inefficiencies. While industry, including MDMA, AdvaMed and LSA,
endeavor to work with all stakeholders to improve the regulatory
environment, we will also be relying on the FDA to utilize its user
fees and appropriations efficiently and effectively.
Looking forward, opportunities remain for further improvements, and
we need to continue to work together so that the United States doesn't
lose its leadership position in healthcare innovation. The FDA has a
crucial mission to protect the public health. Clearly this means
providing reasonable assurance that products are safe before they're
made available to patients. However, I believe it also means that
patients in need of effective treatments should not be unduly deprived
of new innovations because of an inefficient or overly burdensome
approval process. Successfully implementing this aspect of its mission
will depend on a cultural change at the FDA as much as it will rely on
processes and procedures.
As mentioned above, increasing numbers of medical technology
companies are developing and evaluating their products in clinical
trials outside the United States. Given the millions of dollars of
investment that this entails, we look forward to working with FDA on
ways to better leverage these data domestically in a meaningful manner.
I am also encouraged by reports that the FDA is currently focusing
on three highly practical priorities of 1) improving efficiency in
clinical trials, 2) balancing the premarket and postmarket process, and
3) identifying ways to shorten the lag between product approval by the
FDA and reimbursement approval by CMS and/or private payers.
Capitalizing on many of these opportunities will require close
collaboration between patients, industry and the FDA. However, Congress
can play an important role as well, by ensuring that all parties
continue to work in a highly constructive and productive manner.
Thank you for your attention, and I look forward to your questions.