[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

                               __________

          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

                              ----------                              

                     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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
  

                                  
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